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Technology Stocks : Full Disclosure Trading

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To: Gottfried who wrote (6515)	7/25/2003 4:01:36 PM
From: Sam Citron	Read Replies (1) of 13403

OT Gottfried No, STX and MXO have both declined slightly. What especially concerns me is that now WDC cannot buy cheap [under cost] heads from RDRT any more. This is too patently obvious for it to come as any surprise to WDC management. Even a bankrupt entity cannot afford to sell products at a loss indefinitely, so the windfall WDC enjoyed could not have been prolonged in any case. WDC then had a choice: It could do nothing and wait for the inevitable disruption in its supply chain as RDRT's plant was either shut or bought by someone else. Or it could act proactively by making the supply arrangement a captive one by purchasing the plant itself and therefore having more control over their destiny. I do not know the industry well, so it would be foolish for me to secondguess WDC's decision. In my experience, the analysts are also generally dumber and much more risk averse than the companies they cover, so I would have to give WDC the benefit of the doubt. Certainly there's a supply-chain disruption, as the analyst said, but what he failed to say was that it was unavoidable. RDRT was selling the heads at a loss as a temporary measure to operate as close to breakeven as possible pending a sale of their assets. The surprise is that it was a surprise at all. RDRT had a big share of the head assembly market. WDC and other companies that enjoyed the windfall may have hoped that a Japanese company would buy the plant and continue to keep things going as long as possible per the status quo. But obviously that didn't happen. If you buy the argument that the fundamentals of the HDD industry have improved as the weaker players have failed and more uses for HDDs have sprung up, there is no reason why such a return to health should not benefit suppliers to the industry as well. As we know from the semi equip industry, the supplier industry is more volatile than that of their customers, so they need to have very clean balance sheets to ride out the inevitable periods of drought. With the acquisition the former RDRT is now better capitalized (less debt) and somewhat more diversified (integrated). Thus it should be a more viable entity. The question is how Maxtor and Seagate will regard buying head assemblies from a HDD competitor. What choice do they have? Sam

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