Seagate to acquire Maxtor

Posted on February 01, 2006

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By Kevin Komiega

Seagate Technology is in the process of acquiring rival Maxtor in an all-stock transaction worth approximately $1.9 billion. Maxtor and Seagate will continue to operate as separate businesses until the acquisition is finalized, which is expected to occur in the second half of this year.

In terms of “enterprise” (non-desktop) disk drives, the combined company will compete primarily with Hitachi Global Storage Technologies and Western Digital, according to analysts.

The deal is sure to have a ripple effect across the storage industry in many ways. Brian Babineau, an analyst at the Enterprise Strategy Group, believes the biggest impact to customers may manifest in slower price declines-and more stabilized pricing-for hard drives.

“With one less vendor in the market, prices should stabilize, and customers may not see the same price aggressiveness they have seen from drive vendors over the past few years,” says Babineau. But he adds that customers will be taking the acquisition into account much sooner than the third quarter of this year by planning ahead for their next drive purchase.

For example, if a customer’s two main drive suppliers were Seagate and Maxtor they may now be planning to bring another vendor to the table to hedge against pricing control, which would create opportunities for vendors such as Hitachi and Western Digital.

The deal may also serve to rectify some of the trials and tribulations experienced by disk drive makers in recent years. According to Babineau, many drive makers, including Seagate and Maxtor, have battled supply chain issues, quality concerns, and media shortages-problems that a smaller group of vendors can more effectively address. “It’s a good move. Fewer players in the market will provide a chance for more focus on research and development,” says Babineau.

In a research note published by market research firm Needham & Company, analyst Richard Kugele wrote that Seagate will acquire Maxtor for “much needed capacity and valuable engineering talent.” Kugele also says Seagate and the industry will benefit from the added stability of fewer vendors and a more balanced supply-and-demand environment.

Seagate provides hard drives for enterprise, desktop, mobile, and consumer applications. Maxtor’s strength lies in its drives for nearline storage, high-performance servers, and consumer electronics. Although Seagate has seen success with its Fibre Channel drives, it has had some difficulty penetrating the enterprise ATA market, a space where Maxtor has market share.

Seagate CEO Bill Watkins believes that the increased scale of the combined company will reduce overall product costs and provide more-innovative products at more-competitive prices. “Seagate is excited about the opportunity to achieve greater scale, reduce supply chain costs, and leverage combined R&D efforts across a broader product set,” he says.

Seagate’s executive management team will continue to serve in their current roles. The combined company will retain the Seagate name and will be headquartered in Scotts Valley, CA.


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