Samsung-Seagate Deal Typifies Hard Drive Supplier Consolidation

Supply chain consolidation could have a stabilizing effect on hard-disk drive pricing, NPD analyst Stephen Baker told us Tuesday, following storage company Seagate’s announcement early Tuesday that Samsung was buying 9.6 percent of the company. “The HDD market requires economies of scale and this segment has been consolidating for a few years,” Baker said. The Samsung-Seagate agreement followed by a month Western Digital’s announcement that it’s buying Hitachi Global Storage Technologies for $4.3 billion.

The Samsung-Seagate agreement includes a 50-50 stock-cash deal valued at $1.375 billion. Under the definitive agreement, Samsung will combine its HDD operations into Seagate; the companies will extend their existing patent cross-license agreement; Samsung will provide semiconductors to Seagate for use in Seagate’s enterprise solid-state drives (SSDs), hybrid drives and other products; and the companies will co-develop enterprise storage solutions.

Baker said the deal is likely to have little impact on the CE business, except that stabilizing prices for hard disk drives will mean they “won’t decline as fast.” Seagate benefits in getting a stable and secure source for NAND flash memory as that market grows, Baker said. Flash memory is an “increasingly important component to HDDs in hybrid form, and pure SSD drives are an important growth area as well,” he said.

In response to an analyst’s question during a webcast Tuesday about possible regulatory concerns over pending transactions among the top storage suppliers, Seagate CEO Steve Luczo said the company saw no issues ahead and will be working with regulatory agencies to get the transaction approved. Regarding consolidation, Luczo said the consolidation was a reflection of companies creating business models that can fund technology going forward. “The demand for storage is accelerating,” he said. Petabyte growth has been strong over the last 6-8 quarters even in a “lackluster” economy, he said. In order to address the growth, “a lot more investment has to go into the fundamental technology to accelerate aerial density,” he said, and that brings capital costs. Consolidation, he said, allows companies “to make investments in capital and technology to continue to provide these devices that are in such huge demand.”

Storage demand is accelerating as a result of “viewing devices that are putting very rich content in front of people,” Luczo said. High-density content requires mass storage on rotating disk drives because of the cost and density of the technology, he said. “Even though the end viewing device may or may not have a disk drive in it, everything that’s up and down the food chain to pump it through that little viewable window needs to be stored on a rotating disc somewhere,” he said.

For the third quarter ended April 1, Seagate reported net income of $93 million, down from $518 million, in fiscal Q3 2010. Revenue dropped from $3.05 billion in Q3 2010 to $2.7 billion, the company said.