Western Digital Corp. is expected to ask China’s government for approval to integrate the Hitachi Global Storage Technologies Inc. unit it acquired in a 2012 deal that had to pass muster with regulators in major markets around the world.
A nod from China’s Ministry of Commerce is no guarantee—the agency’s “anti-monopoly bureau” has longed voiced concerns about the combination of the two storage products makers.
“Nobody knows what’s going to happen, given the uncertainty of China,” said Jayson Noland, senior analyst in the San Francisco office of Robert W. Baird & Co. “That’s what’s so fascinating about all this.”
China was the last holdout among international regulators to sign off on Western Digital’s $4.8 billion buy of San Jose-based HGST. Its regulators argued at the time that the marriage of two of the largest disk drive companies in the world could shift the competitive landscape to the detriment of consumers in China, one of the world’s largest PC markets.
Western Digital agreed to a series of conditions to get the initial approval of China’s government, including a prohibition on integrating HGST’s operations and separate pricing structures of the two units. Those conditions came with a minimum term of two years and will remain in place until the Chinese regulatory agency “agrees otherwise,” according to filings with the Securities and Exchange Commission.
The agreement reaches two years on March 8.
Executives of Irvine-based Western Digital last week declined comment on their pending request.
Some observers believe China might continue its hardline stance on a Western Digital-HGST integration as a handy way to flex its muscles on the global stage. China has a number of options—it could deny the request, take months to approve it, or amend its requirements.
Priciest Buy
Western Digital got HGST in the priciest buy in the company’s 44-year history.
The deal added key corporate customers and an entree into the growing server and storage market, fueling Western Digital’s ascent as the world’s largest drive maker in revenue and unit sales.
Disk drives, which use spinning disks to store and allow access to data, go into computers, external storage devices, corporate networks and consumer electronics, such as DVR players.
Western Digital has been on a tear since the deal closed. It reported earnings of $2.1 billion on sales of $15.4 billion—both records—for its fiscal year ended in June. Its shares are up about 78% over the past year, with a market value of about $20.2 billion as of last week.
A move to integrate HGST’s operations would bring 45,000 employees firmly into the fold of Western Digital, which employs roughly 103,000, including HGST’s workers. Both units maintain operations around the world.
Integration also would have wide-reaching ramifications for the storage industry and Western Digital’s overall position in the market.
The company stands to improve margins and profits, improve sales with uniformed pricing, and save $400 million in annual costs by cutting redundancies, according to analyst Noland. He pegged the gain in earnings at $1.50 per share, which comes to $354 million.
The latest development comes as HGST plans for a major expansion at its San Jose headquarters. The unit plans to begin construction on a 185,000-square-foot office building and a 150,000-square-foot research and development center this year.
The plan also calls for the demolition of about 1 million square feet of old building space and renovating some existing buildings.
Legacy
The San Jose operation, one of the last legacy manufacturing hubs in Silicon Valley, was established in 1956 and is considered the birthplace of hard drive development.
The first storage unit was introduced there in 1964. It featured a removable disk, a revolutionary technology that eventually ended the era of punched cards.
HGST, which employs about 1,800 people in San Jose, has become an increasingly important growth driver for Western Digital, which tapped its former chief executive, Steve Milligan, to lead the company after the retirement of John Coyne in January 2013.
Hitachi Global last year introduced a new storage drive that could reshape the industry and fuel a wave of innovation to ease the increasing demands of the data explosion.
The key ingredient behind its 6-terabyte Ultrastar He6 hard disk drive is helium, an abundant element that’s difficult to trap and use in storage devices but holds great potential for the sector.
The new helium drive, which increases storage capacity by 50% over the standard 4-terabyte drive, has already attracted an impressive list of customers.
It is being used in data centers run by Los Gatos-based Netflix Inc., Hewlett-Packard Co. in Palo Alto, Shenzhen, China-based Huawei Technologies Co., the world’s second-largest networking equipment maker, and some of the biggest social media and search companies.
