Wednesday, March 09, 2011

Good news for JCY?

San Jose-based Hitachi Global sold for $4.3 billion to Western Digital
By Brandon Bailey
Posted: 03/08/2011 03:55:40 AM PST
Updated: 03/08/2011 03:58:57 AM PST

In the biggest tech deal of the year so far, San Jose-based Hitachi Global Storage Technologies, a Japanese-owned company with deep roots in Silicon Valley, said Monday that it will be acquired by disk-drive giant Western Digital for $4.3 billion in cash and stock.

The deal will give Irvine-based Western Digital control over nearly 50 percent of the market for hard-disk drives, which are facing weaker demand as computer makers turn to greater use of so-called "flash", or solid-state, memory instead.

Some analysts, however, said the consolidation could benefit both Western Digital and its leading competitor, Seagate Technology, which operates out of Scotts Valley. News of the deal sent Western Digital's stock up 15.6 percent to close Monday at $34.68, while Seagate shares rose 9 percent to close at $13.56.

Hitachi Global Storage is a wholly owned subsidiary of Hitachi, the Japanese conglomerate that makes a wide range of industrial, commercial and consumer products. But the Silicon Valley operation has a history dating to the 1950s, when IBM engineers in San Jose developed the first hard-disk drive for commercial use.

For many years, IBM made disk drives and other products at its manufacturing complex on Cottle Road in South San Jose, until the company sold the operation to Hitachi for roughly $2 billion in 2003, which led to the creation of Hitachi Global Storage Technology.

The Hitachi subsidiary currently does much of its manufacturing in Asia, but it has about 2,000 employees at two sites in San Jose, where it maintains its corporate headquarters as well as a research and development operation and some manufacturing.

Hitachi also has pursued plans to convert some of the old IBM property into a mixed residential and retail development; one piece has already become the site of a new Lowe's home improvement store. Hitachi Global Storage spokesman Jim Pascoe said the sale to Western Digital won't affect those plans because Hitachi is retaining the site.

Western Digital is paying $3.5 billion in cash and roughly $750 million in stock to acquire Hitachi Global. Hitachi will have a 10 percent stake in the combined companies and two seats on Western's board. Hitachi Global Storage CEO Steve Milligan will become president under longtime Western CEO John Coyne.

The deal, subject to regulatory approval, will increase Western Digital's share of the disk-drive market from 31 percent to about 49 percent, according to Aaron Rakers, an analyst at the Stifel Nicolaus investment firm. Seagate has about 29 percent of the market.

Although the disk drive business has not been highly profitable for Hitachi, analysts said Hitachi's products should boost Western's standing in the higher-margin business of selling drives for commercial computer systems, where Seagate has been dominant. Western has been stronger in the consumer market.

Overall demand for hard-disk drives has been in decline recently: While the rotating disks are still widely used in PCs and commercial computer systems, manufacturers are making greater use of solid-state "flash" memory in everything from tablets and smartphones to laptops and even some commercial systems. Flash memory is generally faster and lighter-weight, and its historically higher prices are coming down.

The growing popularity of tablet computers is expected to help lower demand for disk drives by 4 percent in the first quarter of this year, according to a report last week from the research firm IHS iSuppli.

While the Hitachi sale could raise concerns about Western's sizable market share, some analysts said the industry consolidation could benefit both Western and Seagate by helping to keep prices more stable and encouraging computer makers to buy from both companies, so as not to become dependent on either one


So JCY's main customer, Western Digital got bigger market share of the hard disk market, which should be better for JCY, right?

But.... what about the economics of the hard disk market itself?

Is it getting any better?

Or should one note the fact that overall demand for hard disk is on the decline?


snowball said...

Perhaps, JCY boss saw the trend of switching towards flash memory and faster go list the company as an exit strategy. It would be fun to see what they say in the prospectus versus what is happening now.

Moolah said...

If there's one thing I would like to ask the boss is mentioned in the posting

Quote: "JCY generated RM19m of negative free cash flow in 1QFY10 due largely to the repayment of RM80m owed to its shareholder."

My question would be "Apa tu?"