Seagate Plans To Buy Samsung's HD Business

Seagate on Tuesday said it plans to acquire the hard drive business of Samsung Electronics in a deal which also gives the two companies new deep supply and cross-licensing agreements and which provides Samsung with a 9.6-percent stake in Seagate.

Seagate also reported disappointing fiscal third quarter 2011 financial results, with sales and earnings down significantly from last year.

The combination of acquisition plans and financial results disappointed investors. Shares of Seagate originally spiked on the news, but then plunged over 6 percent before recovering to $17.55 late in the trading day, which was off about 1.6 percent from the opening bid.

Seagate on Tuesday reported revenue of $2.7 billion for its third fiscal quarter of 2011. This is down 13 percent from the $3.1 billion the company reported for the same period of 2010.

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The company also reported earnings for the quarter of $93 million, or 21 cents per share, down over 80 percent from the $518 million, or $1.00 per share, it reported last year.

Seagate said it shipped 49 million hard drives during the quarter, down nearly 3 percent from the 50.3 million drives shipped during the same period last year.

However, according to financial analyst firm Stifel Nicolaus, the drop in total hard drive shipments over last year was mainly due to an 8.2 percent drop in desktop and mobile PC drives. Shipments of hard drives to the consumer electronic and branded retail market were up 10 percent, while shipments of enterprise drives rose 7.1 percent over last year.

Assuming Seagate closes its acquisition of Samsung's hard drive business, the hard drive industry will be down to three vendors, significantly fewer than the 85 vendors in the industry in 1985.

At the top of the market is Western Digital, which in March said it plans to acquire Hitachi Global Storage Technologies (Hitachi GST) in a $4.3 billion deal.

Should that deal close as expected in the third quarter of 2011, it would leave Western Digital with a combined market share of 48.7 percent, based on 2010 shipment shares according to Stifel Nicolaus.

Hitachi GST is itself the result of a merger of the hard drive businesses of Hitachi and IBM after the two agreed in 2002 to combine their efforts in a joint venture.

In second place would be Seagate which, when combined with Samsung's hard drive business, has a 40.3 percent share of the market.

The third is Toshiba Corp. which in 2009 concluded an agreement to transfer Fujitsu Limited's hard-drive business to Toshiba, creating the world's largest manufacturer of mobile drives. Toshiba has a 10.9 percent share of the market, according to Stifel Nicolaus.

Seagate plans to pay about $1.375 billion in cash and stock to Samsung to acquire that company's hard drive business, which will be combined with Seagate's business.

Samsung has also agreed to supply Seagate with NAND flash memory for use in Seagate's enterprise-class SSDs and hybrid hard drives with solid state memory. Seagate will also supply Samsung with hard drives for that company's PCs, mobile PCs, and other consumer electronics.

The agreement also gives Samsung a 9.6-percent ownership in Seagate and a seat on Seagate's Board of Directors.

Much of the new agreement is an extension of a strategic relationship the two started last August under which the two started cooperating on SSD development. That agreement has already seen results, particularly in Seagate's release last month of new SSDs featuring Samsung technology.

Next: Assessing the new hard drive and SSD competitive environment.

The acquisition of Samsung's hard drive business by Seagate could mean higher prices for hard drives because of the reduced competition as well as a new focus on the SSD business, said Todd Swank, vice president of marketing for Northern Computer Technologies (Nor-Tech), a Burnsville, Minn.-based custom system builder.

"Hard drive competition will always be there," Swank said. "I don't see Western Digital and Seagate going against each other too hard. But with the rise in SSDs, there will be less pressure on them in the hard drive business."

However, Swank said, the deal is good news for Seagate which is now moving fast to be a major player in the SSD business after waiting on the sidelines a couple of years while semi-conductor vendors such as Intel and Samsung took the high ground in this market.

"A couple of years ago, I was worried about Seagate," Swank said. "We saw all those SSD vendors come out and prices fall, and Seagate was unable to compete with the semiconductor companies. So I'm happy for Seagate, which now has a new opportunity in the SSD business."

Seagate expects its acquisition of Samsung's hard drive business to close before then end of 2011.