Taking one for the team never felt so good.
Traditionally, in the hard-disk-drive business, acquiring a rival improved margins for everybody, while not resulting in quite-the-expected market-share gains for the buyer.
But Western Digital, the industry's No. 1, saw its shares jump as much as 19% Monday after announcing it would buy rival Hitachi's disk-drive business. By reducing the number of suppliers to four, the $4.4 billion cash-and-stock deal should smooth the cyclical swings of the business. Even so, with tablets cutting into sales of PCs, it's hard to get excited about hard drives.
Consolidation has been great for the industry, argues Caris & Co. analyst Robert Cihra, as the number of suppliers competing for market share has been reduced by half over the past 10 years. But consolidators themselves have tended to lose share as customers shift orders to continue playing suppliers off one another.
The benefits of this particular deal have investors looking past that risk, however. Western Digital is increasing its market share to 50%, well ahead of No. 2 player Seagate Technology at 29%. It also moves into the more attractive enterprise segment of the market, such as selling disk drives for use in servers. Western also will get to use offshore cash to fund part of the deal, avoiding repatriation taxes.
But the long run doesn't look pretty for hard drives. One concern is the growth of tablets, which use a different storage technology called NAND flash. NAND is much more expensive per gigabyte of storage, so hard drives won't disappear. Nevertheless, tablets could gobble up a chunk of the market.
And even if the information explosion increases demands for storage in data centers, the four remaining suppliers likely will continue to compete aggressively for market share. That should keep a lid on the profit potential and on shareholder celebrations.
Write to Rolfe Winkler at firstname.lastname@example.org