Seagate to Buy Smaller Rival Maxtor for $1.9B

Seagate Technology (STX) on Wednesday said it would buy smaller rival Maxtor Corp. (MXO) for $1.9 billion to gain market share and bolster its No. 1 position in the notoriously cutthroat hard disk drive market.

Seagate Chief Executive Bill Watkins said the company pursued the all-stock deal, priced at a 60 percent premium to Maxtor's closing share price on Tuesday, to get Maxtor's customers, not to acquire a specific technology.

"We want to buy their customer base, their revenue stream and layer it over our manufacturing process," he said in a telephone interview.

The deal would give Seagate, which makes disk drives for Microsoft Corp.'s (MSFT) Xbox 360 gaming console as well as for personal computers, a more than 40 percent share of the disk drive market. It currently has about a 30 percent share.

The transaction, at least in the short term, could actually benefit Seagate rival Western Digital Corp., because customers are wary of giving too much business to one disk drive company, one analyst said. Western Digital has about 16 percent of the global market for disk drives.

"They could see some additional business," said American Technology Research analyst Shaw Wu. "I would not be surprised to see some of those customers shift some of their business."

With the proposed acquisition, Seagate is not moving into a hot new growth market where it hadn't been before. Maxtor's strength is in providing disk drives for workhorse desktop personal computers used by businesses.

Analysts have said Maxtor, which has about 12 percent of the market, was losing market share to competitors such as Seagate and Western Digital in consumer electronics, one of the fastest-growing businesses for computer storage companies.

Seagate CEO Watkins called the deal "an obvious consolidation play," defending the premium paid for Maxtor as fair, given the $300 million of annual operating expense savings he expects would be found after the first full year of the combination.

At current prices, the transaction is worth about $7.25 a share for Maxtor investors. Maxtor's stock has not traded in that range since June 2004.

Maxtor shares rose 51 percent on the New York Stock Exchange, while Seagate's shares climbed about 2.6 percent.

Analysts said that there was some concern that the deal may face regulatory hurdles, which were keeping Maxtor's shares below the deal's premium.

"There's still some doubt on the Street," said American Technology Research analyst Shaw Wu, citing antitrust worries. "The deal's never done until it's done."

Seagate's Chief Financial Officer Charles Pope acknowledged on a conference call that the antitrust review meant the transaction was not likely to be completed until the latter half of 2006.

"I think that at first blush it will appear that there is a significant concentration of (market) share," he said, adding that he does not expect the companies will need to divest any product lines to complete the purchase, in large part due to the competitiveness of the disk drive industry.

"Even after this combination there will be significant competitors out there with very large resources -- both financial and technical resources," he said.

Maxtor shareholders will receive 0.37 shares of Seagate common stock for each Maxtor share they own. Seagate shareholders will own about 84 percent and Maxtor shareholders about 16 percent of the new combined company.

The combination is expected to add 10 to 20 percent to Seagate's cash earnings per share after the first full year of joint operations, Seagate said in a statement.

Seagate also backed its earlier outlook for its second fiscal quarter of $2.2 billion in revenue and earnings per share in the range of 53 cents to 57 cents.

Seagate shares rose 36 cents, or 1.8 percent, to $19.96, and Maxtor rose $2.31 to $6.83, both on the NYSE. Shares of Western Digital rose $2.57, or 16.5 percent, to $18.13 on the NYSE.