Maxtor Now No. 1 Hard-Drive Vendor

Maxtor will offer Quantum's Hard Disk Drive Group stockholders 1.52 shares of Maxtor stock for each share of Quantum stock, making the deal worth about $2.3 billion, company executives say.

The combined company, to be known as Maxtor, will vault over industry stalwart Seagate in terms of hard-drive unit sales.

Seagate sold 36.5 million drives in 1999, compared with a combined total of 52.5 million units between Maxtor and Quantum, according to Peripheral Research. New No. 3 IBM sold 24.6 million drives last year, followed closely by Fujitsu at 21.9 million units and Western Digital at 19.5 million units.

The new Maxtor will offer a broad range of drives, including high-end 10,000 rpm models and 80-Gbyte models.

Both Maxtor and Quantum have been profitable for the past several quarters.

While the hard-drive industry is extremely cyclical in nature, the new Maxtor does not plan to cut production just because of the merger, says John Gannon, president of Quantum's Hard Disk Drive Group. "In the end, volume is determined by customers, not by design," Gannon says.

The cyclical nature of the industry is the reason for the merger, says Gannon. "Cycles in the hard-drive industry have deepened and became more frequent in the past two years than ever before," he says. "While both of our companies have excelled in our operation efforts, and are among the strongest in the industry, we are not immune."

Gannon believes the need to consolidate the industry is strong, but he would not speculate on future mergers. "We can either sit and wait for it to occur, or pull together the strongest players," he says. "Further consolidation will be good for the industry. Our hands are now full with this [merger], so we are not sure what others will be doing."

The new Maxtor will keep all the current production facilities of both companies, including the Quantum partnership with Matsushita-Kotobuki Electronics Industries (MKE). MKE will offer the new Maxtor a high-volume production partner to go with Maxtor's flexible, cell-based facilities, which allows the drive production mix to change on a daily basis if needed, says Gannon.

Maxtor executives expect the combined operations to realize annual cost savings of $120 million to $200 million within 18 to 24 months of the close of the acquisition. Some of the savings will come from reduced administration and support costs, as well as cutting duplications in the product development area, says Gannon. The companies now employ a total of 10,000 people, and layoffs could affect up to 10 percent of employees, he says.

Not affected by the acquisition is Quantum's non-hard drive business, which includes its DLT tape drives and automation products, ATL tape automation subsidiary, and Snap NAS line. These lines are part of Quantum's DLT & Storage Systems Group, which will be known as Quantum after the acquisition. Michael Brown will continue as chairman and CEO of Quantum and will have a seat on the board of the new Maxtor.

James Kula, owner of Kula Computer Service, a Rockford, Ill.-based white-box builder that uses Seagate and Maxtor drives, says he expects the merger to mean less competition in drive prices. "Prices could possibly go up because there is a little less competition," he says.

Other integrators were less excited about the merger due to problems they have had with drives from the vendors in the past. "It's two garbage trucks colliding," says one integrator who preferred to remain anonymous.

Both vendors need elevate quality, says Charlie Cohen, sales engineer for Media Integration, Soquel, Calif. Media Integration builds servers, and if it gets burned once on a hard drive, it avoids that vendor again, says Cohen. It has not used Maxtor for a long time, he says. "I would need a lot of serious convincing to use them again."