Re: Seagate buys Maxtor
- From: Sparky Spartacus <Sparky@xxxxxxxxxxxxxxxxxxxx>
- Date: Fri, 23 Dec 2005 08:49:35 -0500
Another article with some analysis:
Seagate Agrees to Buy Maxtor for $1.9B
By MAY WONG The Associated Press Wednesday, December 21, 2005; 7:37 PM
SAN JOSE, Calif. -- Hard drives have long been unsung workhorses of the digital world _ best when they're quiet, fast and flawless. Competition among their suppliers, meantime, has been fierce.
Seagate Technology's pending $1.9 billion acquisition of rival Maxtor Corp., announced Wednesday, will likely make the industry even more cutthroat.
Scotts Valley-based Seagate, the world's largest disk-drive maker, hopes the move will strengthen its position in an arena where the players are fighting not only each other but also with a competing storage medium _ flash memory, the hidden but powerful element in portable gadgets like the iPod nano.
Prior to the merger, Maxtor ranked fourth in market share, after No. 2 Western Digital Corp. and No. 3 Hitachi Ltd., according to research firm iSuppli Corp. Those top vendors were also competing against deep-pocketed tech conglomerates Samsung Electronics Co. Ltd., Toshiba Corp. and Fujitsu Ltd.
Seagate, like Western Digital and Maxtor, are solely hard-drive makers. Along with Japanese-based Hitachi, which acquired IBM Corp.'s pioneering disk drive business, they have been the long-standing suppliers of the ever beefier and faster hard drives that store data inside huge corporate servers and individual consumer computers.
Today, it's a $48 billion industry of shrinking margins, where innovation is nonstop, development and manufacturing costs are high, and the prices keep dropping.
That's why analysts say the merger, a move toward industry consolidation, was not surprising.
Maxtor lost money in four of its five most recent quarters, in part due to what analysts say were execution missteps, most notably, its absence in the fast-growing, higher-margin segment of mobile disk drives used in laptops and MP3 music players.
Hitachi has been leading that market, followed by Seagate.
The merger will heat up the competition between those two, said Krishna Chander, a senior storage analyst at iSuppli.
"These two giants are innovators, and they will battle it out in every segment," Chander said.
Bill Watkins, Seagate's chief executive, called the acquisition "a leverage deal."
"I'm buying $4 billion in revenue, and I'm going to leverage that in my manufacturing and engineering," Watkins said in a phone interview.
Watkins noted how Samsung, Toshiba, and Hitachi, which have other profitable business divisions, can aim to expand their market share while operating their hard-drive units at a loss.
"They lose hundreds of millions of dollars a quarter. I can't do that," he said. "I need scale and leverage to compete against these guys."
Chander thinks the merger also will lead to a healthier, less price-volatile hard-drive industry at a time when it needs to stay strong to compete against flash drives in the portable gadget business.
"It's about the survival of the hard-drive industry, which will keep the flash guys in check," he said.
Under the terms of the acquisition agreement, Maxtor shareholders will receive .37 shares of Seagate common stock for each Maxtor share they own. Based on Seagate's closing stock price on Tuesday, the deal values each Maxtor share at about $7.25, a 60 percent premium to Maxtor's Tuesday closing price of $4.52 on the New York Stock Exchange.
Seagate shareholders will own approximately 84 percent, and Maxtor shareholders will own approximately 16 percent of the combined company.
The merger is expected to add at least 10 percent to 20 percent to Seagate earnings on a cash basis during the first full year of integration. Also, the combined company expects to save about $300 million a year in operating expenses after the first year.
Shares of Maxtor, which is based in Milpitas, surged $2.41, or 53 percent, to close at $6.93 on the acquisition news Wednesday. The stock has traded in a 52-week range of $3.10 to $6.68. Shares of Seagate rose 23 cents, or 3 percent, to close at $20.23.
Prior to the closing of the deal, expected to occur in the second half of 2006, Seagate and Maxtor will operate as separate businesses. There is a termination fee of $300 million payable to Maxtor under certain conditions, and the deal is intended to be tax-free to Maxtor shareholders.
Seagate reiterated its second-quarter outlook, which calls for $2.2 billion in revenue and earnings of 53 cents to 57 cents per share, excluding stock option expensing. Its fiscal 2006 earnings outlook also remains unchanged at approximately $2 per share, excluding expensing.
Analysts surveyed by Thomson Financial anticipated a second-quarter profit of 51 cents per share, excluding charges, on sales of $2.19 billion.
© 2005 The Associated Press
http://www.washingtonpost.com/wp-dyn/content/article/2005/12/21/AR2005122100396.html?referrer=email&referrer=email&referrer=email .
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