WDC Completes HGST Buyout - Analyst Blog
March 09 2012 - 7:45AM
Zacks
After dealing with a year-long
delay due to government regulatory requirements, hard disk drive
(HDD) manufacturer Western Digital Corp. (WDC)
finally wrapped up the acquisition of Japan-based Hitachi
Ltd.’s (HIT) Global Storage Technology business. Apart
from the agreed purchase consideration, Western Digital had to pay
an additional charge of $392.0 million due to an amendment made to
the purchase agreement.
Story Behind
In March 2011, Western Digital
signed a definitive agreement to take over HGST, for approximately
$4.8 billion. The total consideration was divided into two parts:
cash of $3.9 billion and 25 million shares valued at about $0.9
billion. The acquisition was intended to make Western Digital a
more customer-focused storage company, with significant operational
scale and a product suite that would make it more competitive in
the international market.
But the going was not smooth for
the hard disk manufacturer. Western Digital had to clear several
regulatory hurdles that included concerns related to the
consolidation in the HDD market. More so because at around the same
time, Western Digital’s archrival Seagate Technologies
plc (STX) signed a deal to acquire Samsung Electronics
Co.’s storage business. According to the regulatory bodies, the
consolidation actions by the giants could push smaller HDD vendors
out of the market.
However, in November 2011, the
European Union (EU) approved the deal only after Western Digital
assured that it would sell off some its production assets,
including a manufacturing plant, and transfer some intellectual
property to the new unit. The sell-off guarantee would confirm that
small manufacturers will remain afloat and Seagate Technology would
not be its only rival.
In satisfaction of the EU
requirements, Western Digital sold out some HDD assets to
Tokyo-based Toshiba Corporation last month. Per the contract,
Toshiba will now be able to manufacture 3.5” HDDs for desktop and
consumer electronics markets and can become a direct competitor to
Western Digital.
Current
Scenario
The acquired HIT unit will become
Western Digital’s wholly-owned subsidiary and will operate
independently for two years to comply with the principles of fair
competition in the market.
Western Digital expects the
acquisition to make a favorable contribution to its non-GAAP
earnings. Despite a huge pay-off, the company expects to maintain a
positive net cash position, which could be due to expected
significant contribution from HGST.
To Conclude
We believe the acquisition will
help Western Digital to take the lead in the hard drive market, as
the additional capacity would alleviate supply issues. Of course,
neck-to-neck competition with hard drive and flash drive
manufacturers that supply to companies like Apple
Inc. (AAPL) and Nokia Corp. (NOK) should
not be discounted.
As per a recent forecast made by
U.S. market research firm IDC, HDD revenues could grow at a 5-year
CAGR (2011-2016) of 8.6% annually. We think that leveraging HGST’s
technology and business exposure, the company could capitalize on
the opportunity.
This apart, we remain encouraged by
the company’s announcement that it has made significant progress to
restore its manufacturing capacity following the recent flooding in
Thailand. The company has already increased its HDD production in
Thailand and expects to resume to its normal operations
shortly.
With all the good news in its
kitty, we believe that Western Digital deserves a Zacks #1 Rank,
implying a short-term Strong Buy rating.
APPLE INC (AAPL): Free Stock Analysis Report
HITACHI (HIT): Free Stock Analysis Report
NOKIA CP-ADR A (NOK): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
WESTERN DIGITAL (WDC): Free Stock Analysis Report
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