Seagate to acquire Maxtor

By Kevin Komiega

December 23, 2005—Seagate Technology made a move this week to strengthen its position in the disk drive market by announcing a deal to acquire rival Maxtor in an all-stock transaction worth approximately $1.9 billion.

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

"We'll have one less vendor in the market. Prices should stabilize, but customers may not see the same price aggressiveness they have seen from drive vendors over the past few years," says Babineau.

Seagate is expected to close the acquisition of Maxtor in the second half of 2006, at which time it will be one of three major suppliers of hard drives for the enterprise storage market, followed by Hitachi and Western Digital. But Babineau says customers will be taking the acquisition into account much sooner than the third quarter of next 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 Western Digital and Hitachi.

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," Babineau says.

In a research note published by market research firm Needham & Company, analyst Richard Kugele writes 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 near-line 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.

Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Maxtor shareholders will receive .37 shares of Seagate common stock for each Maxtor share they own. When the transaction is completed, Seagate shareholders will own approximately 84% and Maxtor shareholders will own approximately 16% of the combined company.

Seagate's CEO Bill Watkins believes that the increased scale of the combined company can 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," says Watkins.

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. Dr. C.S. Park, Maxtor chairman and CEO, will become a director of Seagate upon the closing of the transaction.

Maxtor and Seagate will continue to operate as separate businesses until the acquisition is finalized next year.

This article was originally published on December 22, 2005