Western Digital Corp.’s pending $4.3 billion buy of Hitachi Global Storage Technologies Ltd. promises to bring the Irvine-based disk drive maker more than just added size, customers and dominant market share.
It also is set to give Western Digital an edge in drives for corporate networks—the most profitable part of an industry largely known for commodity products.
“Hitachi is strong in the traditional enterprise markets, and Western Digital is strong in the branded and consumer markets,” said Tim Leyden, Western Digital’s chief operating officer, on a call with analysts last week. “We are acquiring a well-run company with a remarkable amount of complimentary capabilities.”
Western Digital said last week it’s set to pay cash and stock for San Jose-based Hitachi GST, as the company is known, in a deal that’s set to close in the third quarter.
Japanese parent Hitachi Ltd. is set to get a roughly 10% stake in Western Digital and two seats on the company’s board.
It’s the biggest technology deal of the year so far and one of the biggest in the history of Orange County’s tech sector.
Corporate Drives
Hitachi GST is a big player in corporate drives, which are used by banks, retailers and others that need to store vast amounts of data.
Western Digital’s biggest source of revenue is from sales of drives that go into desktop PCs, laptops, servers, portable storage devices and other consumer products.
The company “had a very limited position before in the enterprise drive business,” said Fang Zhang, an analyst at El Segundo-based market tracker iSuppli Corp., a unit of Colorado’s IHS Inc. “By acquiring Hitachi, they are instantly getting an enterprise business and gaining share.”
Corporate drives are one of the last bastions of healthy markups for an industry known for slim profits.
Sales of enterprise drives are seeing an upswing amid renewed spending on technology by corporations this year.
The acquisition should lift Western Digital’s long-term gross margin targets by about one percentage point to a range of 19% to 24%, according to executives.
Some analysts think that’s conservative.
“Hitachi’s cost structure has been improving over the last couple of years, and we believe that Western Digital’s gross margins could be materially better than the guidance,” said Kaushik Roy, a data storage analyst at Wedbush Securities Inc. in San Francisco.
The deal is a major consolidation move in an industry marked by intense competition.
It’s set to make Western Digital the undisputed leader in drives. The company now leads by number of drives shipped but is second in revenue to archrival Seagate Technologies LLC, which sells more corporate drives.
Western Digital
2010 drives sold: 203.7 million, up 23% from 2009
Market share: 31%, up from 30%
Drive revenue: $9.9 billion, up 19%
Hitachi
2010 drives sold: 115.8 million, up 25%
Market share: 17.6%, up from 16%
Drive revenue: $6 billion, up 25%
Source: iSuppli Corp.
When the deal closes, Western Digital will have about 49% of the overall drive market, 50% of the laptop drive market and 52% for desktop PCs.
“We see this as the final large-scale merger in the industry and the foundation of an oligopoly in the space,” Richard Kugele, an analyst at Needham & Co., said in a research note.
Scotts Valley-based Seagate counted about 30% of the market in 2010, according to iSuppli.
Before striking the deal for No. 3 Hitachi GST, Western Digital had 31% market share based on drive shipments, according to iSuppli. Hitachi had nearly 18%.
Rounding out the market: Japan’s Toshiba Corp. with 11%, and South Korea’s Samsung Group at 9.6%.
Hitachi
Hitachi GST got its start when its Japanese parent acquired IBM Corp.’s ailing drive unit for $2 billion in 2002.
Tokyo’s Hitachi combined IBM’s drive operations with its own and formed a U.S.-based joint venture, which became Hitachi GST.
The unit was run by a team of executives from Hitachi and Big Blue.
Hitachi should be “a good fit culturally” with Western Digital, according to iSuppli’s Zhang.
“Culturally, they are a U.S. company,” she said. “The parent Hitachi is hands-off and has been so for the entire life of the company.”
It’s unclear what will happen to Hitachi GST’s local operations, which it picked up in a buy a few years back.
Milligan
Hitachi GST owns what used to be Santa Ana’s SimpleTech, a maker of storage drives for consumers that once was part of Santa Ana-based STEC Inc.
STEC sold off its ailing consumer unit to San Mateo-based Fabrik Inc. for $43 million in 2007. Fabrik was bought by Hitachi GST in 2008.
Hitachi GST’s top executive, Steve Milligan, is set to join Western Digital as president and report to Chief Executive John Coyne.
This is Milligan’s second go-around at Western Digital.
He joined the company in 2002 as vice president of finance, then reporting to finance chief Scott Mercer, who most recently ran Newport Beach chipmaker Conexant Systems Inc.
Milligan was promoted to senior vice president and chief financial officer at Western Digital in 2004.
He left Western Digital to join Hitachi GST as chief financial officer in 2007, where he’s credited with helping the company navigate a slump that started that year.
He was named president in early 2009 and then chief executive later that year.
Milligan’s drive roots trace back to his early career at PricewaterhouseCoopers International Ltd., where he worked for a dozen years. He was responsible for auditing IBM’s global manufacturing operations, including its drive business.