Partners welcome Seagate's move to buy Maxtor for $1.9 billion

In a year of mergers and acquisitions, Seagate Technology has decided to sign off the year in a flourish by acquiring Maxtor Corporation. This acquisition cost Seagate $1.9 billion in stock.



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.



The transaction is expected to be completed in the second half of calendar 2006, subject to obtaining shareholder approvals and customary regulatory approvals. There is a termination fee of $300 million payable to Maxtor under certain conditions. The transaction is intended to be tax-free to Maxtor shareholders



The combined entity will continue to be run by Seagate CEO, William Watkins, while Maxtor's CEO CS Park, might be made a director. “The combined company will retain the Seagate name and executive offices will be located in Scotts Valley, California. Dr. Park will become a director of Seagate upon the closing of the transaction. Seagate's chairman, CEO, executive vice presidents, and the principal equity investors affiliated with certain of Seagate's Directors have committed to vote their shares in favor of the acquisition” said a press release issued by the vendor.



Incidentally, Seagate and Maxtor also share common distributors in India, who were not keen to comment on this development. While an official for a Maxtor distributor said that he was aware of something of this nature in the offing, he was unwilling to give an official statement on how this takeover would affect their business.



Rajeev Sood of Transtek Infoways, one of Maxtor's distributors, also declined to comment on this development, preferring to wait till more definite details of the acquisition were worked out. “As of now several things are unclear about whether the merged entity would retain all its distributors and their own employees and how they would like to position the brands in the market. Till such time it would be unfair for me to comment on it,” he added.



There is a bit of confusion as to why Seagate decided to takeover Maxtor in the minds of the channel community. Both companies had similar product lines and while Maxtor was meant for budget buyers, Seagate positioned itself as a premium brand that offered value for money.



And it is not like Maxtor had a very significant market share either, especially in India, which would boost its own market share with the takeover. Said one source, “Seagate worldwide has a share of over 47%, while Maxtor would have another
20% and Hitachi, Samsung and others shared the remainder. By taking over Maxtor, Seagate has upped its market share by just another
20%, which could not be the reason behind this acquisition. So what is it?”



In its official press release, Seagate offers “the combination of Seagate and Maxtor will leverage on the strength of Seagate's significant operating scale to drive product innovation, maximize operational efficiencies, and realize significant cost synergies. These capabilities will enable the combined company to compete more effectively as the highly competitive data storage industry addresses the challenges and opportunities for significant growth that lie ahead. The combined company will be well positioned to accelerate delivery of a diverse set of compelling and cost-effective solutions to the growing customer base for data storage products.



The combined company is expected to generate significant synergies, and the transaction is expected to be at least 10-20% accretive to Seagate on a cash EPS basis after the first full year of combined operations. As with other past combinations of disc drive manufacturers, revenue attrition is anticipated to result from this combination. Synergy estimates take into account anticipated revenue attrition. It is estimated that the incremental revenues will generate gross margins that are in line with the high end of Seagate's stand-alone model. In addition, the combined company expects to achieve approximately $300 million of annual operating expense savings in connection with the transaction after the first full year of integration.”



“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. With the increased scale of the combined company, we can reduce overall product costs and provide more innovative products at more competitive prices,” said Bill Watkins, Seagate CEO. “We believe this is a strategic combination that will provide value for our shareholders as well as benefits for our customers.”



There is no doubt in the channel community's mind that with this acquisition, Seagate will create a very strong position in the market. Said Ganesh Gupta of Fortune Marketing in Hyderabad, “Seagate was a well known name in the market while Maxtor was selling to a very small customer base. I don't think Maxtor had more than 5% to 6% market share. So this acquisition will be good news to all HDD channel partners.”



Puneet Oberoi of Infotech Group, Jalandhar felt that this move marks the consolidation of Seagate in the market and is a sign of more mergers to come. “Seagate has better service facilities and by taking over one of its competitors, it will become a stronger force in the market,” he says adding that where earlier partners would pitch a lower-priced Maxtor against Seagate, they might now promote other HDDs brands like Hitachi and Samsung, in case Seagate takes any monopolistic stance.



However, the distributors will not be a very happy lot. For instance, if earlier they could get stock worth Rs 1 crore from Seagate and another stock worth Rs 1 crore from Maxtor, this will now cease to exist. The combined entity will offer only stock worth Rs 1 crore to the distys, again based on their credibility and payment record and will also not give them more credit time. Explaining this rationale, one source said, “If you want a loan of Rs 1 lakh from a bank and it merges with another bank, then the new entity will not give you a loan of Rs 2 lakh just because of its merger. It will still give you a loan of Rs 1 lakh, as that is what your repayment eligibility is.” This analogy explains what the distys will now have to grapple with.



As with any acquisition there is currently a lot of speculation about how customers, partners and the company employees will be affected. It is too early to deduce anything at the moment. However, DQ Channels will follow this merger closely and will keep the channel community posted on how they will be affected most by it.