Hitachi, IBM To Combine Hard Drive Businesses

IBM Corp. Hitachi Ltd.

Terms of the deal were not disclosed, but Hitachi is expected to have a 70 percent stake in the joint venture.

The two companies also agreed to collaborate on developing open data-storage systems in the competitive storage market. They have not chosen a name for the combined company.

The joint venture will be based in San Jose, Calif., where IBM's disk development and engineering offices are located. Both companies will contribute executives and employees.

IBM counts some 15,000 employees in its hard drive business, at plants in Singapore, Thailand Japan, Hungary, Germany, Mexico and Hungary. The company has not determined whether all employees will move to new venture.

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The deal is subject to regulatory approval in the United States.

If approved, the new company would combine Hitachi and IBM's disk drive divisions, including employees, plants and intellectual property. Both companies plan on purchasing a large portion of their hard drive supplies from the joint venture.

IBM spokeswoman Laura Keeton said employees at both companies had been notified, but the deal had not been closed.

Keeton did not know if the deal would need regulatory approval in Japan.

IBM's hard disk business is a division of the company's troubled Technology Group, the sector identified by chief financial officer John Joyce as one of the prime reasons that IBM issued a rare earnings warning on Monday.

Nick Donofrio, IBM's senior vice president of technology and manufacturing, said the venture was aimed at cutting costs through large-volume production.

"Size is the answer," Donofrio said. "We've got the technology and the people. We've got to get an economy of scale. Merging these businesses will give us the size we're looking for."

Hitachi said its annual revenue in the hard disk drive business was still relatively small at about $760 million.

Annual revenue of the new joint venture with IBM is expected to total about $3.8 billion to $4.6 billion, officials said at a news conference at Tokyo hotel.

Hitachi President Etsuhiko Shoyama said his company was aiming for the No. 1 spot in the world in the storage business through its alliance with IBM.

"This alliance was formed because we want to be winners in this area," he told reporters. "Hitachi believes it's not worth pursuing this business unless we can be No. 1."

When asked whether IBM was planning to pull out of the hardware business, IBM Group Manager of Storage Production Division Walter Raizner denied that IBM's strategy had changed.

"We are still a technology company," he said. "The base technology is very important."

IBM said it expects to earn 66 cents to 70 cents a share for the quarter that ended March 31, below the 85 cents a share expected by analysts surveyed by Thomson Financial/First Call.

IBM earned 98 cents per share in the first quarter of 2001.

Joyce said he expected the Technology Group, which currently makes semiconductors and storage drives sold to computer makers, will lose $200 million in the first quarter, amid revenue declines of around 35 percent.

IBM is scheduled to report its earnings for the first quarter of 2002 at 4 p.m. EST Wednesday.

Analysts have suggested IBM's financial problems extend beyond the company's technology division.

Keeton said the company's announcement of the joint venture after the markets closed Tuesday was not tied to its impending Wednesday earnings report.

Shares of IBM were up 85 cents to close at $86.20 on the New York Stock Exchange, and gained another 5 cents in extended trading.

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