By Shira Ovide
- Bloomberg News
Seagate is buying most of Samsung Electronics’ computer hard drive business in a cash-and-stock deal valued at $1.38 billion, in the latest sign of consolidation in the fiercely competitive business.
Seagate shares are slipping about 2.75% in recent trading.
Deal Journal takes a look at the pros and cons of the deal from the perspective of Seagate, which itself was the target of failed takeover talks last year.
Pros:
Consolidation: As hard drive makers fight hard over pricing, the industry sensibly is pairing up to compete. Seagate rival Western Digital last month agreed to buy Hitachi’s disk drive businessin a deal valued at $4.3 billion at the time the deal was announced. Western Digital-Hitachi and a combination of Seagate and Samsung’s hard drive business would control roughly 85% to 90% of the business, according to data from IHS iSuppli. “Although we expect pricing pressure to persist near term, we believe profitability will rebound due to industry consolidation,” S&P wrote in a research note about Seagate.
Pipeline for Flash Memory: As part of the deal, Samsung will keep a 9.6% stake in the hard drive business, and it agreed to provide Seagate with NAND flash memory products – the rising category of computer-data storage that competes with Seagate’s magnetic disk drives. Access to this intellectual property could make the deal worth it for Seagate, even excluding the expected revenue bump from the merger.
Cons:
Computer Drives on the Wane: The Samsung deal doesn’t fix the fundamental quandary about Seagate: Whether hard drives will be rendered obsolete by the rise of smart phones, iPads, some laptops and other devices that don’t use traditional data storage. Companies and consumers also can afford to wait on computer upgrades as PC components become smarter and more efficient. Gartner recently reported a decline in personal computer shipmentsworldwide, another sign Seagate soon could be the Mastiff in an emptying dog park.
Antitrust Risk: Will regulators allow the hard-drive market to rapidly winnow from five competitors (Samsung, Toshiba-Fujitsu, Hitachi, Seagate and Western Digital) to just two major players?
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