Western Digital Corp.’s $65 million buy last week of Aliso Viejo’s SiliconSystems Inc. shows that the disk drive maker is planning for a sea change in its market.
The cash deal signaled Lake Forest-based Western Digital’s entrance into the market for a new type of drive that has no moving parts, is more durable, saves power and is faster at some tasks than traditional disk drives are.
Solid state drives, as they’re called by industry insiders, have grabbed the attention of the top drive makers because they’re starting to replace mechanical disk drives in high-end data storage networks, notebook computers and other industry-specific devices that can’t break down.
The buy “certainly validates the market,” said Richard Kugele, a Needham & Co. analyst based in Boston. “Generally, we view the deal as a low cost way of targeting solid state drives, but it will require significant further investment.”
There are three broad markets for solid state drives.
SiliconSystems is a player in what’s called “embedded systems.” That’s where drives are used for industrial purposes by the military and medical, aerospace and defense companies.
“The embedded space was the largest sub segment of the market last year at about $400 million,” said Don Bennett, vice president of business development for Western Digital. “That’s part of what attracted us to SiliconSystems.”
The second market, still tiny, is for PCs. Solid state drives are popping up in place of disk drives in notebooks and high-end desktop computers for playing games.
The third market is putting solid state drives to use in high-end data storage networks that are sold to big companies, such as banks and retailers, which have to store a lot of transactional data and keep it secure.
Western Digital is looking to be in all three areas, but it’ll take some time to fine tune the technology enough to be able to make its own solid state drives.
“The technology will take quite a while to become something that’s more enterprise class,” Kugele said. “Western Digital has an excellent track record with acquisitions and should not be underestimated even if it takes a number of years for a true enterprise solution.”
Western Digital said it plans to fold SiliconSystems into a new division called WD solid-state storage, with Michael Hajeck, founder and former chief executive of SiliconSystems, running the unit as a Western Digital vice president.
Part of what drew Western Digital to SiliconSystems was its group of engineers.
“Contacts suggest that SiliconSystems has an excellent engineering team and should be able to be redirected to more compelling markets,” Kugele said.
Market Share
The buy puts Western Digital ahead of Scotts Valley-based rival Seagate Technology LLC in a growing,but still small,market.
Seagate is the top maker of disk drives. Western Digital is close on its heels as the No. 2 maker.
Industry watchers and Wall Street analysts have long speculated that Seagate could swoop in and buy Santa Ana’s STEC Inc., another local maker of solid state drives, to get into that market.
STEC has been making waves for the past two years as it’s racked up key design wins with EMC Corp. and others that sell to big corporations.
Western Digital’s Bennett declined to say if STEC was an acquisition target.
Analyst Kugele said that it’s likely STEC, which had a recent market value of about $400 million, would have commanded a much steeper premium.
“This acquisition may also suggest reluctance on Western Digital’s part to pay up for a more substantial acquisition in the space, allowing other hard disk drive companies to acquire industry leader STEC.”
Western Digital’s buy “certainly raises the ante on the companies that are left,” Kugele said. “Someone will have to take them out.”
SiliconSystems’ Customers
SiliconSystems’ biggest customers are in telecommunications.
Its drives go into cell phone base stations on wireless networks run by Sony Ericsson Mobile Communications AB, France’s Alcatel-Lucent and Canada’s Nortel Networks Corp., among others.
The solid state drives go into a slew of industrial devices, including video surveillance systems, voting kiosks and automated manufacturing gear.
Some get sold to top-tier defense contractors for use in destroyer ships, planes and tanks.
Another niche market is “interactive kiosks,” such as digital slot machines, self-check-in stations at airports and cash registers.
In 2008, SiliconSystems saw about $47 million in yearly sales.
Hajeck, who has some two decades in the storage industry under his belt, founded SiliconSystems in 2002.
The company had raised venture funding from Miramar Venture Partners, Rustic Canyon Partners, Shepherd Ventures and the investment arms of Samsung Group and SanDisk Corp.
Hajeck tinkered with the first flash drives at Milpitas-based SanDisk and did stints at Torrance-based MicroNet Technology Inc. and SyQuest Technology Inc., now called SYQT Inc.
He built up and ran the business that later became STEC after the company sold off its SimpleTech consumer line a few years ago.
For Hajeck, having Western Digital as a new parent is something to be proud of.
“Western Digital wants to see us grow our existing business,” he said. The deal “removes the stigma of dealing with a small, privately held company that doesn’t disclose its financial condition. Now we are part of a publicly traded, $8 billion company.”
Western Digital saw sales of $8 billion for the 12 months through June and had a recent market value of about $4 billion.
