Western Digital to Buy Hitachi Global for $4.3 Billion
Western Digital’s proposed $4.3 billion acquisition of Hitachi Global Storage Technologies will likely throw support behind Hitachi’s bid to define next-generation hard drive technology, analysts said. The proposed purchase, which is expected to close in Q3, consists of $3.5 billion cash, including a five-year, $2 billion term loan, and 25 million shares of Western Digital stock. Hitachi will own 10 percent of Western Digital as a result of the sale.
In buying the Hitachi venture, Western Digital appears to be putting R&D muscle behind Hitachi’s patterned media technology, a means of precisely locating bits on a spinning disk that could require 12.5-nanometer lithography. Western Digital rival Seagate developed heat-assisted magnetic recording that requires a laser to raise the temperature of a recording spot on the disk by several hundred degrees for 150 picoseconds. The three companies formed the Storage Technology Alliance last year to devise a road map for hard disk drive technology, which industry executives have called for since the emergence of perpendicular recording in 2005. The technologies are designed to increase hard drive aerial densities beyond a terabit per square inch with a goal of eventually surpassing 50 terabits.
It wasn’t clear at our deadline what the future of the alliance might be in the wake of the Western Digital-Hitachi deal. If approved, the deal would create a company with 49 percent share of the global hard drive market and $4 billion in combined annual sales. Hitachi officials weren’t available for comment. But the purchase “greatly enhances” Western Digital’s position, Western CEO John Coyne said Monday on a conference call.
"This is a great time in the industry for this transaction to take place,” Coyne said. “Digital content continues to grow, applications continue to proliferate, and Internet bandwidth is expanding -- all of this driving unprecedented demand for digital storage of content, both locally and in the cloud. We believe this combination greatly enhances our ability to define, develop and deliver an increasing diversity of storage devices connected directly to PCs and edge devices and the centralized cloud infrastructure."
The acquisition will greatly enhance Western Digital’s position in enterprise storage where Hitachi fields Ultrastar 3.5- and 2.5-inch hard drives with SCSI, fiber channel, SAS and SATA interfaces. Hitachi also fields 2.5-inch Travelstar mobile drives and markets Cinemastar 3.5- and 2.5-inch products for CE applications. Western Digital has a strong position in consumer external hard drives. anchored by its My Book products. It successfully pushed to increase the maximum capacity of internal PC drives to 3 terabytes last year.
Western Digital’s position in solid-state drives also will be bolstered by the acquisition. Western Digital plunged into solid-state drives with the purchase of SiliconSystems and Hitachi will give it access to a joint development agreement with Intel, executives said. Hitachi and Intel are sampling potential customers for enterprise-grade solid-state drives and the partnership isn’t expected to change as a result of the sale, said a statement by Hitachi CEO Steve Milligan, who is a former Western Digital chief financial officer. Milligan, who will be president of the combined company, joined Hitachi as CFO in 2007 and was named CEO two years later.
Hitachi will give Western Digital its first manufacturing facilities in China and the Philippines. Hitachi produced 80-90 percent of the components for its drives. Western Digital has head and wafer fabrication plants in Fremont, Calif., and Phoenix, and operates a huge hard drive assembly plant in Malaysia. Western Digital gradually built up its manufacturing business, most recently in 2007 by buying hard drive platter supplier Komag. Western Digital also is moving to a new headquarters in Irvine, Calif. Other operations in Irvine and Aliso Viejo, Calif., where SiliconSystems was located, are being moved to the new headquarters, the company has said.
"There are some differences in each equipment set and we are in the early stages of evaluating that,” Western Digital Chief Operating Officer Timothy Leyden said. The combined company will have 19-24 percent gross margins within six months of the sale’s closing and operating expenses will be 9-10 percent of annual revenue, or about $400 million, Leyden said. While Western Digital didn’t disclose any restructuring plans that might stem from the acquisition, executives said they were confident any reshuffling could be carried out successfully.
Western Digital’s 31 percent share of the global hard drive market will be bolstered by Hitachi’s 18 percent, executives said. The combined company expects it will lose some customers after the acquisition, dropping its share into the mid-40 percent range, executives said. At retail, Western Digital had a 49 percent unit share of the 2010 U.S. retail hard drive market, while Hitachi had three percent, said Steve Baker, vice president of industry analysis at NPD Group. Overall, Western Digital had a 31 percent share of the global hard drive in Q4 with shipments of 52.2 million units, followed by Seagate (30 percent, 48.9 million units), Hitachi (18 percent, 30.3 million units), Toshiba (11 percent, 18.5 million) and Samsung (10 percent, 16.5 million), iSuppli said.