Western Digital-Hitachi Deal Means One Less Hard Disk Drive Manufacturer

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Two decades ago, there were 86 hard disk drive (HDD) manufacturers.

Soon there will be just four, as Western Digital Corp. (NYSE: WDC) yesterday (Tuesday) announced a $4.3 billion deal to acquire Hitachi Global Storage Technologies (HGST).

The addition of Hitachi's business will give Western Digital approximately 50% of the HDD market, putting it well ahead of Seagate Technology PLC (Nasdaq: STX), which has just under 30%, according to data from IHS iSuppli. The remaining 20% is split between Toshiba Corp. (PINK: TOSBF) and Samsung Electronics (PINK: SSNLF).

Analysts saw the deal as a positive for the industry as a whole. Jayson Noland, an analyst with Robert W. Baird & Co., told the Associated Press that Hitachi had been "a thorn in the side of this industry for a long time in overproducing drives."

"They're a part of a bigger company and didn't seem to care if they lost money," he said. "It's a good deal, and to be honest, Seagate should send flowers to Western Digital. They're going to be the natural recipient of market share, just because Western Digital did this."

The departure of Hitachi as a separate HDD manufacturer continues a pattern of consolidation that dates back two decades, since the rapid expansion of the PC market in the late 1980s and 1990s commoditized hard disks.

Hitachi Ltd. (NYSE ADR: HIT) bought International Business Machines Corp.'s (NYSE: IBM) HDD business back in 2002; Seagate bought Maxtor in late 2005. The last major deal was Toshiba's acquisition of Fujitsu Ltd.'s (PINK ADR: FJTSY) HDD business in 2009.

"Twenty years ago, there were 86 companies in this industry, today we're heading tofour – it's a tough business and you have to address it with the right business model," Western Digital chief executive John Coyne told the Financial Times.

In such a commoditized market, Western Digital's larger size will help it to squeeze out more profits.

"A huge amount of this is about scale, economies of scale, scale of R+D, scale of portfolio … and did I mention scale?" Mark Peters, senior analyst at Enterprise Strategy Group, told eWEEK. "Making money in this high-volume business requires scale in most respects."

Western Digital also picks up Hitachi's desirable server and enterprise business, one the few segments of the HDD market that's still expanding.

"The enterprise HDD market garners significantly higher margins than the consumer segment, which makes the enterprise a fast-growing market for HDD revenue," said Fang Zhang, a storage system analyst with iSuppli. "To date, WDC has largely been absent from the enterprise segment. However,HitachiGST brings WDC the essential technology, product portfolio and experience required to compete in the enterprise segment."

Hard drives remain the cheapest form of mass storage, a key consideration for companies with mammoth storage needs.

The consumer HDD market, which consists mainly of the drives in desktop, laptop and notebook PCs, has been pressured by the shift toward mobile devices. Smartphones and tablets use flash memory, not hard drives, for data storage.

Loss of share in the consumer segment is perhaps the only negative for Western Digital in the deal, since both companies have a significant presence there.

On the other hand, the acquisition brings Hitachi's Solid-State Drive (SSD) partnership with Intel Corp. (Nasdaq: INTC), which will give Western Digital a crucial foothold in the next big market in digital storage for consumers.

With no moving parts, SSDs deliver more durability and faster performance than HDDs, though they cost significantly more for comparable capacity. Typically based on flash memory, SSDs have already begun to replace conventional hard drives in some devices. As their prices fall, SSDs will cannibalize more and more of the consumer disk storage market.

Finally, the Hitachi deal will give Western Digital a boost from the intellectual property and manufacturing efficiencies it will gain, said David Reinsel, the vice president of storage and semiconductor research at IDC. He applauded the deal.

"WD has never fumbled an acquisition that I can remember, and they've done plenty," Reinsel told Computerworld. "I would look for them to be successful with this one as well."

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