U.S. based disk drive producer Western Digital Corporation (WDC) recently announced that it has entered into a definitive agreement to acquire Hitachi Global Storage Technologies, a wholly owned subsidiary of Hitachi Ltd.
The deal is valued at approximately $4.3 billion, which will be paid with cash and shares of WDC common stock. Specifically, the breakup has been settled at $3.5 billion in cash and 25 million Western Digital common shares valued at $750.0 million.
This news pushed up Western Digital share prices by 11.6%, to $34.68 on Monday, while the shares of Hitachi Ltd., advanced by 1.8% to 514 yen, climbing to a two-year high in Tokyo.
This sale will result in the biggest asset disposal that Hitachi has ever made. The company is involved in making devices for nuclear power plants, trains and other infrastructure related products. Moreover, for Western Digital, this buyout will help it climb up to the top of the hard drive market, although the company will have to deal with competition from smaller hard drive and flash drive manufacturers that supply to companies like Apple Inc. (AAPL) and Nokia (NOK).
This acquisition is expected to make Western Digital a more customer-focused storage company, with significant operational scale and a product suite that will make it more competitive in the international market. On the other hand some industry experts believe that the combined entity may lose some marketshare, as several smaller players are supplying hard disk drives at a competitive price.
The deal has been approved by the boards of both companies and is expected to be completed by the third quarter of 2011 along with all regulatory approvals.
The company has always been active on the merger and acquisition front. In the past few years, its acquisitions have added scale to its operations and expanded business volume.
Moreover, in July 2010, Western Digital completed the previously announced acquisition of magnetic media sputtering operations of Hoya Corporation and Hoya Magnetics Singapore Pte. Ltd. (a group company of Hoya Corporation) for approximately $233.0 million. The company has taken over facilities, equipment, intellectual property and the working capital of Hoya’s media sputtering operations, based in Singapore. The company also acquired certain equipment from Hoya’s facility in Japan. This new acquisition helped Western Digital gaining access to Hoya’s existing customers.
In March 2009, Western Digital acquired SiliconSystems Inc. for $65.0 million; gaining access to the latter’s existing market. Besides, SiliconSystems’ intellectual property and technical expertise are also helping to address emerging opportunities in the company’s existing markets.
Western Digital faces intense competition in the hard disk manufacturing space, with Seagate Technology (STX) being its top rival. Western Digital and Seagate have combined 30.0% share of the hard disk market, which is expected to remain constant after the takeover. Customer concentration is another risk. Hence, we maintain our Neutral rating on Western Digital shares on a long-term basis.
For the short term, Western Digital holds a Zacks #3 Rank, which translates into a Hold recommendation.
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