Seagate Is Not For Sale, Who Will Buy It (STX, WDC, IBM, HPQ, SNDK, AAPL)

Earlier this week Seagate Technology PLC (NYSE: STX) said that it was ending discussions with private equity firms concerning a possible sale, and that the company would instead begin a $2 billion stock buyback program.The company did not say that it had also discussed a takeover offer with disk drive rival Western Digital Corp. (NYSE: WDC). At least that’s what Bloomberg News reports based on conversations with “two people with knowledge of the matter.”
Western Digital is said to have been willing to pay from 10% to 50% more than the offer from private equity firm TPG Capital — an offer rumored to be on the order of $7.5 billion. A tie-up between Seagate and Western Digital would have launched an anti-trust investigation of epic proportions. Together the two companies shipped more than 100 million hard drives in the third quarter of 2010, nearly two-thirds of total worldwide sales.
It’s relatively simple to see why Seagate would want to be bought out by a private equity firm. Disk drive makers live on gross margins of around 20% and net margins in the single digits. Scale really matters, as does being able to manufacture the right quantities of the right products at the right time. That’s why IBM Corp. (NYSE: IBM) and Hewlett Packard Co. (NYSE: HPQ) decided years ago to get out of the disk drive business.
Then there’s the competition from solid-state drives, SSDs, coming from competitors like Sandisk Corp. (NASDAQ: SNDK). Though SSDs are still much more costly than rotating magnetic storage, costs are falling quickly and volumes are picking up. SSDs are not yet a particular threat to large enterprise storage sub-systems, but they are beginning to have an impact on notebook computing like the Macbook Air and hand-held devices like the iPod Touch from Apple Inc. (NASDAQ: AAPL).
The deal with TPG Capital probably fell through because Seagate has already been through privatization in the early part of this decade, and most of the costs that could be wrung out of the operations are likely already gone. The private equity firm just couldn’t see a way to make a profit on the deal.
For Western Digital, a takeover of Seagate makes sense except for the anti-trust issue. A long, costly investigation wouldn’t do either company any good. Add in the price Western Digital might have to pay, and the deal was just never going to happen.
Paul Ausick