Original URL: http://www.theregister.co.uk/2010/09/06/hitachi_gst_ipo/

Hitachi GST: Sale or IPO?

'Ere... wanna buy a high-ranking disk drive operation?

By Chris Mellor

Posted in Storage, 6th September 2010 09:18 GMT

Opinion Hitachi is reported to be considering an IPO or sale of Hitachi GST, its disk drive operation, ranked third in the industry behind Seagate and Western Digital. How much is it worth? Who would want to buy it?

IPO

Hitach GST had revenues of $4.8bn in 2009. We can look at the annual revenues of Seagate and Western Digital and relate these to their market capitalisation to get an idea of how Hitachi GST's revenue could relate to its potential market capitalisation - how much the stock market would think it would be worth.

Seagate's fiscal 2010 revenue of $11.4bn is 2.2 times its current market capitalisation of $5.27bn. Western Digital's latest annual revenue of $9.8bn is 1.6 times its $6.10bn market capitalisation. Applying the same relationships to Hitachi GST's 2009 annual revenue gives us a potential market capitalisation of $2.18bn to $3bn, with $2.6bn as the rough mid-point.

If Hitachi GST were put up for an IPO would investors stump up $2.6bn for it? Storage array suppler Nexsan pulled its IPO in April. Hitachi GST has a relatively recent history of being profitable, and operates in an industry with highly complicated and frontier-pushing technology. It also has to operate with intensely detailed and intricate manufacturing processes.

We are not talking about a startup here with glamorous growth prospects in a potentially booming market, but a relatively mature number three player in a stable and steadily growing market. That doesn't sound exciting for investors. It's riskier than a utility company play with dependable revenues but less so than, say, a solar energy start-up.

Falling between the two extremes of investment dependability and high-growth prospects, Hitachi may be better advised to look for a sale of its GST operation.

Who will buy?

Who might buy it? Who could afford the $2.6bn it might cost?

The obvious answer is one of its four competitors; Samsung, Seagate, Toshiba and Western Digital.

They could each benefit from an increase in HDD unit volume lowering their costs per drive and thus increasing their profitability.

Samsung has about 10 per cent of the hard disk drive (HDD) market in units shipped terms and so could use Hitachi GST's 18.1 per cent share to boost its share to the 28 per cent level, within striking distance of Western Digital's 31 per cent and Seagate's 3.5 per cent shares. Without such a boost it's hard to see how it could grow its way organically out of the niche it is in.

Samsung would also get an entry into the enterprise HDD market and could replace the Hitachi GST-Intel solid state drive (SSD) partnership with one based on its own NAND.

The Samsung-Seagate SSD partnership would probably have to be sacrificed though, were Samsung to become a much stronger HDD competitor to Seagate. Toshiba has recently bought Fujitsu's HDD operation, demonstrating a desire to expand its HDD market presence and prospects. Adding Hitachi GST's market share to its own would catapult up into near-parity with the big two in the HDD industry.

The Hitachi GST-Intel solid state drive (SSD) development relationship could be replaced by one using Toshiba NAND chips and, say, a SandForce or similar controller.

Toshiba would get a desktop 3.5-inch product line and Hitachi GST's LifeStudio consumer storage brand, with its focus on being a content management and sharing abstraction layer, looks to have sufficient differentiation to continue alongside Toshiba's own consumer storage products. Toshiba as a Japanese company might also have a cultural advantage in talking to Hitachi.

For Seagate, getting hold of Hitachi GST would return it to the number one slot in the industry with a 48.6 per cent share. That might be enough to spark competition worries in an industry with just four players, one top dog, a middle ranker and two weaker players.

The Hitachi GST Intel SSD relationship would probably be terminated in favour of the SSD partnership Seagate has with Samsung. The LifeStudio Hitachi GST storage brand looks to complement Seagate's own consumer storage brands focussed on media playing in the home.

The same market domination worry could apply to Western Digital if it bought Hitachi GST. The Hitachi GST Intel partnership might well be of interest to WD, supplementing its current niche SSD operation.

Wildcards

Are there likely to be any purchasers outside the HDD industry? For example, would HP want to vertically integrate downwards? Would Oracle want to own its own HDD operation? Would Huawei like to become the first Chinese HDD manufacturer?

These are potential wildcard purchasers and the investment bankers appointed by Hitachi, if the Reuters report is right, will be asking themselves such questions. Hitachi GST is keeping silent, saying it does not comment on rumour or speculation.

El Reg reckons the top four horses in the Hitachi GST Sale Stakes race, if it takes place, will be Western Digital, Seagate, Toshiba and Huawei, in that order. ®