Seagate Agrees to Buy Samsung's Drive Unit

APRIL 20, 2011 THE WALL STREET JOUTNAL

By DON CLARK And JUNG-AH LEE
Seagate Technology PLC agreed to buy Samsung Electronics Co.'s disk-drive business for $1.38 billion in cash and stock, in a data-storage alliance between the companies that could cap a consolidation wave in the industry.

The deal will leave Samsung with a 9.6% stake in Seagate, a Silicon Valley pioneer in hard-disk drives, as well as a board seat. Besides Seagate acquiring selected portions of Samsung's business, the companies agreed to cooperate in several areas.

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Samsung, for instance, agreed to give Seagate a guaranteed source of supply for chips known as flash memory for use in products such as enterprise data-storage devices. Seagate, in turn, will supply disk drives to Samsung for personal computers and consumer-electronics devices. The two companies also agreed to share patents and work together to define new data-storage products.

"It's not that Samsung is not a believer in drives, but for Seagate and Samsung to work together we should have a clean alignment and not compete in some fundamental technologies," said Steve Luczo, Seagate's chief executive, in an interview.

But the move comes amid continued pressure in the disk-drive business, which has long been marked by boom-and-bust cycles and sharp price declines.

Scotts Valley, Calif.-based Seagate, in addition, released quarterly financial results Tuesday that Mr. Luczo said reflected several quarters of pricing pressure.

For the fiscal third quarter ended April 1, Seagate's net income fell 82% to $93 million, or 21 cents a share, from $518 million, or $1 a share, a year earlier.

Revenue slid 12% to $2.7 billion from $3.05 billion.

Earlier this month, Seagate projected revenue of $2.7 billion, at the high end of its previous forecast. For the quarter ending in June, Seagate projected revenue to be "flat to slightly down" compared with the third period, in part because of uncertainty surrounding the effects of the earthquake in Japan.

In addition to short-term pricing pressure, drive makers haven't participated in one of the fastest-growing sectors in technology—smartphones and tablet computers, such as Apple Inc.'s iPad, which use flash-memory chips rather than drives to store data because of advantages such as speed and lower power consumption.

Mr. Luczo said the flash trend isn't a long-term negative for his company since such devices have such little storage capacity that content will have to be stored on disk drives on servers. "You are not going to be storing more than four movies on your iPad," he said.

But the trend has hurt share prices in the past year of companies not benefiting from the growth in mobile devices. Seagate's stock, though, has rebounded recently; it was trading 3.5% lower at $17.22 on the Nasdaq Stock Market, following the news.

For Seagate, which has led the disk-drive business for much of its existence, the deal with Samsung could help counters the recent rise of rival Western Digital Corp. The Southern California-based company last year eclipsed Seagate to take the top spot in global shipments, and then moved to cement its leadership in March with a $4.3 billion cash and stock deal to buy Hitachi Ltd.'s drive business.
Seagate had roughly 32% of the hard-disk-drive market as of the first quarter of this year, according to the market research firm IHS iSuppli. Combining its operations with Samsung, its share would reach about 40%, placing it behind the Western Digital-Hitachi combination, which would account for about 50%.

Analysts have argued that the shift to three remaining large suppliers—with the combination of Toshiba Corp.'s disk-drive business with Fujitsu Ltd.'s making up the trio—would create long-term price stability the segment has long lacked.

"The drive industry is at the beginning of a new era," argues Richard Kugele, an analyst at Needham & Co., marked by more efficient utilization of factories and profitability.
Mr. Luczo stressed that Seagate isn't acquiring all of Samsung's drive business—only selected components that fit well with Seagate's business, he noted. As a result, Seagate will not have to go through the kind of lengthy restructuring that accompanied the company's major purchase in past years, such as Conner Peripherals, Maxtor and Control Data's drive business, he said.
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"We're getting what we need," Mr. Luczo said, "and everything else is being left behind."
Seagate said it expects the deal to add to its earnings and cash flow in the first full year following the closing, and it doesn't expect any major restructuring costs.

For Samsung, the deal marks the first major division sale since it sold its power semiconductor business for $455 million to Fairchild Semiconductor Corp. in 1998 and will help the South Korean company focus on more growing areas such as next-generation displays and solar cells.

"Samsung looks forward to extending our existing strategic ties with Seagate, to deliver creative technology solutions for a broad diversity of consumer, business and industrial applications," said Oh-hyun, Kwon, president of the semiconductor business of Samsung Electronics, in a statement.
The deal, which requires U.S. and international regulatory approvals, is expected to close by the end of this year.

—Shara Tibken contributed to this article.
Write to Don Clark at don.clark@wsj.com