FTC: Western Digital-Hitachi Deal Hinges on Asset Sale to Toshiba

By Pedro Hernandez

Last year, almost to the day, Western Digital announced that it was acquiring Hitachi Global Storage Technologies (GST) for more than $4 billion. This week, the Federal Trade Commission (FTC) ruled that the deal isn't quite sealed yet.

At the time, John Coyne, Western Digital's president and chief executive officer, painted a picture of two storage companies whose market approaches dovetailed nicely. He singled out Hitachi GST's silicon wafer fabrication and engineering as two bright spots that would help flesh out Western Digital's product portfolio. Hitachi GST, meanwhile, has been trying to live up that reputation with efforts like developing enterprise-class SSDs with help from Intel.

However, it's the companies' overlapping 3.5-inch hard disk drive (HDD) businesses that have caught the FTC's attention.

In order to maintain healthy competition in the 3.5-inch HDD market, the FTC is requiring Western Digital to sell some of Hitachi GST's IP to Toshiba for the multi-billion dollar deal to definitively close.

"Western Digital's proposed acquisition of Hitachi Global Storage Technologies would likely be anti-competitive and would violate Section 5 of the FTC Act and Section 7 of the Clayton Act by reducing competition in the worldwide market for desktop hard disk drives," states the Commission.

Left unchanged, the acquisition would essentially cede the 3.5-inch HDD market to Western Digital and Seagate. It's a landscape Seagate had a hand in molding when the hard drive maker scooped up its rival Maxtor in late 2005 for $1.5 billion. Before that, Hitachi bought IBM's ailing hard drive business.

To remedy this, the FTC calls for Western Digital to "divest selected Hitachi Global Storage Technologies assets related to the manufacture and sale of desktop hard disk drives to Toshiba within 15 days of the acquisition." The FTC is also granting an extra 15 days "to allow the companies to receive regulatory approval in other jurisdictions."

The IP and asset sale would allow Toshiba to manufacture desktop HDDs -- a market where it currently doesn't compete -- and fill the void otherwise left by Hitachi GST, according to the FTC. In its estimation, Toshiba would make a worthy competitor.

"Because Toshiba has extensive experience manufacturing these other types of hard disk drives, and has an existing worldwide infrastructure for the research, development and sale of desktop hard disk drives, Toshiba is well-positioned to replace the competition that will be eliminated as a result of the proposed transaction," writes the FTC.

Western Digital seems to be taking things in stride. A week before the FTC publicly revealed its decision, the company announced that it had agreed to sell an "asset package" to Toshiba that would enable it manufacture and sell 3.5-inch HDDs. Terms of this deal, which is expected to close this month, have not been disclosed.

Pedro Hernandez is a contributor to the IT Business Edge Network, the network for technology professionals. Previously, he served as a managing editor for the Internet.com network of IT-related websites and as the Green IT curator for GigaOM Pro. Follow him on Twitter @ecoINSITE.

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This article was originally published on March 06, 2012