Seagate in Deal to Buy Rival Maxtor
Seagate Technology Inc.’s purchase of rival Maxtor Corp. would give the world’s largest hard drive maker a commanding presence in a fast-growing but rapidly changing market.
The $1.9-billion all-stock deal announced Wednesday would increase Seagate’s production capacity at a time when factories worldwide are churning out as many hard drives as they can to power a proliferation of computers, digital music players and video game consoles.
Buying Milpitas, Calif.-based Maxtor would raise Scotts Valley, Calif.-based Seagate’s share of the global $27-billion hard drive market to 42% from 28%, according to technology research firm IDC.
“All the hard drive manufacturers are manufacturing at full capacity,” IDC analyst David Reinsel said. “This gives Seagate some additional capacity and keeps it out of the hands of other competitors.”
Antitrust regulators probably will review the deal, which Seagate executives expect to close in the second half of 2006.
“I think that at first blush it will appear that there is a significant concentration of share,” said Seagate Chief Financial Officer Charles Pope.
But uniting Seagate, which is profitable, and money-losing Maxtor would still leave six major hard drive makers in a rapidly changing global market. For years, market leader Seagate and its competitors sold primarily to computer makers. As PC prices plummeted in recent years, margins followed.
And as manufacturers battled each other for market share, they grappled with the threat of increasingly popular, and ever cheaper, flash memory.
To diversify, Seagate is catering to the growing demand for components of consumer electronics such as MP3 players, hand-held computers, cellphones and digital video recorders.
The company provided hard drives for Apple Computer Inc.’s iPod mini music player and is the primary supplier of the 20-gigabyte hard drive in Microsoft Corp.’s Xbox 360 video game console.
“Clearly [consumer electronics] is one of the areas that could lead us into new spaces, but there’s also security, and enterprise, with regulations that cause data to be active longer online,” Executive Vice President Brian Drexheimer said. “What this positions us for is higher aggregate investment that leads us to a broader product line.”
The rise of flash memory widely used by consumer devices is not much of an immediate threat to Seagate and other hard drive makers, IDC’s Reinsel said, because it overlaps with only about 2.5% of the hard drive market.
Shares in Seagate rose 63 cents to $20.23. Maxtor shares surged $2.41 to $6.93. Even shares of Lake Forest-based Western Digital Corp., which jockeys with Hitachi Corp. as the No. 2 hard drive maker, climbed $2.89 to $18.45.
Western Digital executives declined to comment, but analysts speculated that shares were buoyed because hardware makers might diversify their suppliers to prevent Seagate from gaining too much market and pricing power.
Under the terms of the deal, Maxtor shareholders would receive 0.37 share of Seagate for each Maxtor share they own. At current prices, it values Maxtor at $7.25 a share, a premium of more than 60% over its Tuesday closing price. Seagate shareholders would own about 84% of the combined company.
Seagate would acquire an underutilized Maxtor PC hard drive factory in Suzhou, China, adding to Seagate’s overall capacity.
Maxtor executives did not return calls seeking comment.
About 85% of Seagate’s $7.5 billion in annual sales comes from desktop, laptop and server computer hard drives. It earned $707 million in its last fiscal year.
IDC reported Tuesday that it expected the global PC market to grow 15.8% in 2005 and an additional 10.5% next year.
“We love the growth prospects of the industry,” Seagate’s Drexheimer said.
By contrast, Maxtor last year lost $183 million on sales of $3.8 billion.
Maxtor is expected to lose 8 cents a share on revenue of $3.87 billion in the year ending Dec. 31, according to Wall Street analysts surveyed by Thomson Financial. Analysts expect Seagate to earn $1.85 a share in its fiscal year ending in June on sales of $8.34 billion.
Seagate executives expect to trim $300 million in annual operating expenses from the combined company, which would be called Seagate and run by Seagate’s management. Transaction costs are expected to be $500 million, which includes charges for staff cuts.
Seagate did not say how many jobs might be lost.
Associated Press, Bloomberg News and Reuters were used in compiling this report.
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Expanding capacity
Worldwide market share of hard drives in the third quarter of 2005
Seagate: 27.8%
Western Digital: 17.7%
Hitachi: 14.8%
Maxtor: 13.7%
Toshiba: 9.4%
Other: 16.6%
Source: Gartner
