Original URL: http://www.theregister.co.uk/2009/01/16/seagate_in_a_spin/

So when did the knives come out at Seagate?

To lose one C-level exec may be regarded as a misfortune...

By Chris Mellor

Posted in Storage, 16th January 2009 16:28 GMT

Comment To lose two CxO-level officers in one day is exceptional, even by Seagate standards. Last week's axing of CEO Bill Watkins and the resignation of COO David Wickersham resembled a day of the long knives in Scotts Valley. So how did it come to this?

The events timeline looks like this:

1. At a Barclays Capital analysts' conference on December 10 Watkins and CFO Pat O'Malley talked of Seagate's need, because of the recession, to learn how to make a profit as a $2bn/quarter revenue company, down from the $3bn/quarter company they had become accustomed to. The company was already in the midst of a restructuring (cost-reduction) exercise.

2. Before CES in Las Vegas, Watkins and the board met. This was in the knowledge of a reduced expectation for the final calendar '08 quarter of revenue in the $2.3bn - $2.6bn range (SEC filing Dec 10). They agreed a rough 10 per cent headcount cut, where budget would be spent and where it would be saved.

3. At CES up to and including Friday, both Watkins and Seagate's consumer business president, Brian Dexheimer, spoke fairly freely and said that December revenues had gone off a cliff, that a 10 per cent staff cut was coming, that, in Watkins's view, this was now the time to press ahead with innovation so that you could build market share in the recovery period after the recession, and that he saw no sense in buying Fujitsu's distressed hard disk drive business. There would be/should be more HDD industry consolidation and maybe the Fujitsu HHD business, TDK and Toshiba might form a second Japanese HDD supplier alongside Hitachi GST.

There were no signs that Watkins was contemplating resigning. However, the December revenue figures - flagged as surprisingly bad by Watkins - could conceivably have meant that the final quarter's revenues were going to drop below $2bn.

4. Here we start speculating; over the weekend of January 10 and 11 the Seagate board must have conferred. Someone must have said that they thought Seagate could do something different, and that maybe Seagate could have done better. The company could cut costs more deeply and concentrate more on conserving cash than on continuing product development and innovation to be poised for market capture when the recession ended.

So we can imagine a board consensus about the need for this and an approach to Watkins: "Bill, we think you should cut deeper and spend less on innovation." Watkins may have said no.

Sentiment turned

Sentiment must have turned against Watkins continuing as CEO. Board members may have been reminded that competitor Western Digital's performance stock-wise and marketwise had been better than Seagate's. Watkins has admitted that Seagate misjudged the need for notebook drive capacity increases, giving WD the opportunity to make up ground and surpass Seagate in notebook drive technology, which it duly did.

The board members may have been reminded that WD was far more effective in selling external drives, whereas Seagate has two distinct external drive brands and has not combined its own and the acquired Maxtor external drive operations. It was being comprehensively out-marketed and outsold here. Financially WD had performed better too, both in share price and market capitalisation terms.

In fact, WD with its Velociraptor 10K drive has the sexiest hard drive on the market.

The board may also have been cognisant that Watkins had earlier admitted he didn't expect the recession in August and September and, clearly, December took him by surprise too. It may well have collectively felt that its CEO should have steered the Seagate ship better, anticipating the rise of notebook drive demand and foreseeing the recession and its course with more alacrity. Should he be trusted to do better in the future?

Seagate spokesperson Forrest Monroy said: "There was no conflict or falling out between Bill and the board or senior management team; it was a situation in which the board made the determination that Steve was the right person to lead the company right now."

So, if Bill Watkins was now felt to be the wrong leader for Seagate, who was the right one?

At this point we can rule ex-COO David Wickersham out of the story. He played no part in these board ruminations as he'd resigned a few days before. Monroy said: "Dave Wickersham's resignation was an event separate from Watkins. Dave resigned last week, and details of his departure were finalized within a timeframe that coincided with communicating that on Monday." Robert Whitmore, the chief technology officer, was appointed to replace Wickersham with immediate effect on Monday.

What a steep learning curve the man faces. He'll know something about the innovation side of Wickersham's job, but the rest will only amount to second-hand and worse knowledge.

The reason for Wickersham's resignation is not known. However, it must have added to the level of stress within Seagate's executive and board ranks. The COO was going and now a CEO change was being contemplated.

Back to speculation: there are two possible options we could imagine here. First, another CEO candidate was identified and asked to be interim CEO and cut operating Seagate's cloth as the board now wished, but said no. Secondly, the board had already decided that chairman Stephen Luczo, a previous CEO, was the best interim choice.

So the board, Luczo, or Lydia Marshall, the lead independent director and chair of the nominating and corporate governance committee, told Watkins that they thought he should no longer continue as CEO. He didn't resign and they didn't fire him from the company, as the statement issued on Monday made clear: "Mr. Watkins will be advising Mr. Luczo in order to ensure a smooth transition. In addition, Messrs. Luczo and Watkins will confer over the next week to determine what role, if any, Mr. Watkins will have at the Company going forward."

This picture of Seagate's board considerations and communications with Watkins is speculative and founded on a belief that some set of events and considerations like this must surely have happened for the actual events to have taken place - but it could well be wrong.

Monroy warns: "I can't speculate on the sequence or content of what the board discussed as it related to our financial results or a management change, and would discourage you or other reporters from committing such speculation to print, since that would be a lot of guesswork that readers would mistakenly equate as fact." Consider yourself warned.

Immediate future

The Seagate SEC filing said: "Seagate plans to reduce approximately 10-percent of its U.S. workforce in a restructuring program to be announced later this month, when it has notified the affected employees. This restructuring will impact a broad range of departments, including research and development, and is being done in response to the current economic environment." The 10 per cent cut referred to just the US workforce, not the world-wide headcount, meaning about 800 people. Seagate felt it necessary to put the clause in about R&D restructuring. Seagate may now be preparing a more wide-ranging restructuring than Watkins, and possibly Wickersham, would have contemplated. Again we are speculating here. The elements of such a restructuring could include:

- Moving production capacity from high-cost plants to lower-cost ones and moth-balling or closing the idle plants. It is easier to do such things outside the USA and western Europe
- Preparing to lay off more workers (more than 10 per cent)
- Planning a longer-term restructuring of manufacturing to move more of it into low-wage economies in the Far East. This puts plants such as the Londonderry one in North Ireland, and USA plants such as Shakopee and Bloomington, at risk
- Combining the two separate external hard drive lines into one
- Bringing the R&D horizon closer and looking only, say, at the next two generations of hard drive technology and not three or four
- Accelerating the switch to 2.5-inch drives
- Delaying or closing the solid state drive development work. (On the other hand this could be actually accelerated as it is potentially high growth.)

With cash conservation and cost-cutting the likely two main drivers of Seagate's activities over the next couple of quarters, an acquisition of Fujitsu's HDD business looks to be completely off the table.

The company is due to report its fiscal Q2 results (the last calendar quarter for 2008) on January 21. Whitmore, the new COO, will have an awful lot of detailed work to do so that Luczo and O'Malley can present a coherent and clear picture of how Seagate is responding to the results, which may include a loss. Are we looking at revenues of $2bn, or less and possible negative net income of $0.1 -$0.05/share for the quarter?

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