Seagate to buy Maxtor for US$1.9 billion

Seagate announced Wednesday that it has offered to buy 84 per cent of Maxtor for US$1.9 billion in an all-stock transaction.

The deal, which would see the combined California-based drive manufacturers carry the Seagate name, has been approved by the boards of both companies. It is expected to be completed in the second half of next year.

Seagate predicted that the combined entity will generate “significant synergies,” including saving US$300 million in annual operating expenses after the first full year of integration.

“These capabilities will enable the combined company to compete more effectively as the highly competitive data storage industry addresses the challenges and opportunities for significant growth that lie ahead,” Seagate said in a statement.

The deal is a vindication of sorts for Dr. C.S. Park, a member of Maxtor’s board who stepped in to become CEO in November 2004 when the company was in trouble and brought in Michael Wingert the same month to be president and CEO. Duston Williams was added as vice-president and chief financial officer a month later.

Maxtor had been losing money and market share in enterprise and desktop spaces, said Brian Babineau, an analyst with the Enterprise Strategy Group based in Paolo Alto, Calif. In the third quarter of 2004 it lost US$95 million alone.

But the moves to shake up the company worked. In October it reported a third quarter loss of only US$17 million.

“Seagate wanted to wait to make sure the turnaround was complete but (Maxtor) was not too big, and went after it,” observed Babineau.

“It’s an aggressive move by Seagate, and a good job by Maxtor to turn the Titanic around before it sunk.”

Babineau thinks Western Digital should be pleased because a competitor, particularly among OEM storage and PC manufacturers, has been taken out. Maxtor was a big foe in the consumer and small server markets, he said. Its stock price jumped on the news, he noted.

“I think Hitachi (Global Storage Technologies) is a little more concerned because it built up (market) share when Maxtor faltered . . . Seagate’s going to be a much stronger competitor against Hitachi.

“The happiest company may be Toshiba who I believe is coming back into the disk drive business slowly with their own technology for consumers. Now they’ve got a little bit more room for their products.”

Corporations, storage manufacturers and system builders have seen great deals when buying hard drives for the past few years as competition and innovation drove down prices.

But if Seagate Technology seals its bid to buy Maxtor Corp. the price of mass storage could increase, according to industry members.

With the number of American hard drive manufacturers knocked down to two (the other is Western Digital) and Seagate able to get better pricing from its suppliers, buyers going to get better quality drives, predicts Babineau.

“But they’re going to have to pay a bigger price,” he added.

“When you go to fewer (hard disk) suppliers you have to expect pricing to be a little bit higher, or more stable.”

“Given the consolidation in the marketplace, I can’t see how this will bring additional downward pressure on prices,” agreed Howard Goldberg, president of Skydata Corp. of Mississauga, Ont., which resells storage systems from EMC Corp., Sony and others.

“One would believe it will have the opposite impact.”

On the other hand, he added, if Seagate is more profitable by eliminating a competitor, buyers should see benefits in better drives.

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