| Seagate acquires Maxtor
21 December, 2005
By Paul Weinberg
Wednesday's announcement that Seagate has acquired Maxtor
is not a complete surprise to industry analysts who follow
what is described as a volatile low-end and low margin disc
drive market.
"I am not surprised that Maxtor was acquired; they had
been ripe for a takeover for a while. I am a little surprised
that it is Seagate [that purchased Maxtor], instead of some
of the smaller players, someone like Samsung or even Hitachi,"
said Jennifer Ewen, a market analyst for storage products
at Evans Research Corp.
Maxtor never recovered financially from the loss "of
a huge amount of sales," she told eChannelLine, following
the revelation of problems in its manufacturing process which
apparently was affecting the quality of an unknown number
of drives.
This is an industry where the winning players are able to
provide a reliable and predictable supply of quality product
to computer hardware manufacturers, stated Tony Prigmore senior
analyst at the Milford, Mass.- based Enterprise Strategy Group.
"The storage industry has had a lot of mergers and acquisitions
in the last 24 months."
The halving of the profit margin from 17.2 per cent in 2003
to 9.8 per cent in 2004 for the approximately $3.8 billion
(U.S.) Maxtor resulted from by what its CEO C. S. Park described
in the company's last annual report to shareholders as "quality
and engineering issues."
Upon the completion of an all stock transaction valued at
$19 billion (U.S.) Seagate shareholders will own about 84
per cent of the new combined company, while Maxtor shareholders
will hold another 16 per cent.
Seagate generated approximately $7.55 billion (U.S.) in fiscal
2005. The principles of the new combined Seagate and Maxtor
"expect to achieve approximately $300 million (U.S.)
of annual operating expense savings in connection with the
transaction after the first full year of integration,"
the two companies announced on Dec. 21.
The acquisition will culminate in the achieving of "greater
scale" through the "reduct[ion] of supply chain
costs and leverage combined R&D efforts across a broader
product set," stated Bill Watkins, the Seagate CEO.
Seagate's past strength has been its ability to run an efficient
operation in terms of its manufacturing and supply chain in
a market space where "it is a tough place to make a living,"
stated Charles King, the principal for the Hayward, Calif.-based
Pund-IT.
"It has been able to squeeze out every dollar that can
be squeezed out of that market. [Seagate] is the equivalent
of Dell."
Seagate's success stems from its ability "to broaden
its horizons" beyond PCs and cut deals to supply smaller
and portable disc drives to the manufacturers of digital cameras,
video recorders, iPods and other non PC digital devices, added
King.
Furthermore, Seagate, which has been described as a strong
marketing company, will take advantage of Maxtor's engineering
expertise.
"Maxtor was innovative in the last three or four years
in being the first to take ATA into the enterprise. Other
disc drive vendors have since come into that space,"
stated Prigmore.
Hardware vendors will likely be nervous about relying solely
upon two major suppliers of disc drives -- Seagate and Western
Digital -- following the elimination of Maxtor from the competition,
added Ewen.
"I think it will open up more share for the more marginal
players [in disc drives] like Samsung, which are small but
have hung around the market for years."
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