Update: Why Seagate Is Buying Maxtor

Seagate's plan to acquire rival disk-drive maker Maxtor will create a major force to be reckoned with in the storage industry.

The all-stock transaction announced Wednesday, valued at $1.9 billion, will make Seagate, already the market leader, the most dominant supplier of personal, desktop, notebook and enterprise disk drives. Subject to regulatory and shareholder approval, the deal is scheduled to close in the second half of 2006.

Unlike past megamergers in the disk-drive industry, such as Hitachi's acquisition of IBM's disk-drive business and Maxtor's acquisition of the hard disk-drive business of Quantum, experts see Seagate's acquisition of Maxtor as a clear consolidation play, given the significant product overlap of both companies' product lines.

"I don't think there's going to be any integration here; there may be some technology they can use, but this is purely a power play," says Gartner analyst John Monroe. "It's a very good deal for the investors [a 60 percent share price premium], but unfortunately not a good deal for many Maxtor employees." It probably will squeeze the two companies' suppliers as well.

Seagate has a 28.8 percent share of the disk-drive market for the first three quarters of 2005, while Maxtor, the No. 3 player, has 14.3 percent of the market, according to Gartner.

"Seagate is the most formidable force in the hard disk-drive industry--this just makes them a more formidable force," Monroe says. That doesn't mean the new Seagate will ultimately have 43 percent of the market, most agree.

"This will bring some opportunities to some of the other drive vendors," says IDC analyst John Rydning. "However, it may be a challenge for those players to pick up additional business because the industry is fully utilized in terms of capacity."

Company officials conceded that the acquisition will lead to some share loss, but believe that by combining manufacturing, supply chains and other operations, that the resulting company will be a much stronger player.

"The combined company will be better positioned than either company on a standalone basis," said president and CEO Bill Watkins on a conference call to investors announcing the deal. Watkins said it was too early to predict how the product lines will be impacted, noting it could be about nine months before the combination is complete, and the companies will continue bringing out new products.

But, says Brian Dexheimer, Seagate's executive vice president, "We expect over time we will migrate to Seagate's product lines. In terms of programs, it's our expectation whether we keep our products or the brand, [that] Maxtor's products will fall under the Seagate programs."

Distribution partners says the impact on the channel should be beneficial in that it should bring more stability for the rest of the vendors.

"If it's is an acquisition that can offer more scale, or efficiency, and more products for Seagate, we truly believe that would be good for us and our reseller and systems-builder partners," says Dan Schwab, vice president of marketing at D&H. "I think this establishes them as a key technology vendor that will be driving technology for the foreseeable future in storage."