WDC: Further Thoughts On Hitachi Deal’s Effects
By Tiernan Ray
blogs.barrons.com
The Street continues to parse the implications of today’s announcement by Western Digital (WDC) that it will purchase Hitachi’s disk drive unit for $4.3 billion. Western shares closed up $4.67, or 16%, at $34.68, and shares of several storage names jumped as well, despite a generally weak market.
IHS iSuppli analyst Fang Zhang notes that the deal gives Western Digital a much-needed advance in the enterprise market, where the company has had the smallest unit shipment total of any vendor to date. Hitachi’s drive division “brings WDC the essential technology, product portfolio and experience required to compete in the enterprise segment,” says Zhang. Seagate gets 65% of its sales from the enterprise market, versus just 1% in Western’s case.
Needham & Co.’s Richard Kugele this afternoon reiterated a Strong Buy, writing that this is the fifth major integration/combination/consolidation in his time covering the industry, and that a duopoly is now forming for the drive makers.
The combination gives WDC 49% of the drive industry by units, he observes, with roughly half of each of the notebook and desktop markets, though some “share leakage” is unavoidable for WDC. Western’s management said today the deal would increase gross margin by 1 percentage point thanks to higher volume and richer mix of products, but Kugele thinks that view is “conservative.”
Kugele has a price target of $41 on WDC shares.
Kugele also cut his rating from Strong Buy to just Buy on shares of Intevac (IVAC), which makes tools used by hard drive makers. Kugele estimates the Hitachi unit provided 20% of Intevac’s revenue last year, and that may decline under Western Digital’s ownership.
Western relies upon Canon’s Anelva business for much of its equipment, Kugele notes. Also, he writes that Western management intend to be “careful with its capex,” which suggests restraint in buying new equipment. Kugele’s price target on Intevac is $14. The shares today fell 54 cents, over 4%, to $12.43.
Meantime, JMP Securities’s Alex Gauna thinks the deal is a bad thing for Marvell Technology Group (MRVL), which supplies controller chips to the disk drive industry. Western is a 21% customer of Marvell’s, while Seagate represents less than 10% of Marvell’s revenue. He cut his target price on Marvell to $25 from $22.50, and cut his revenue estimate for this fiscal year ending in January of 2012 to $3.73 billion from a prior $3.8 billion.
Judging by what happened when Seagate bought Maxtor in December of 2005, it’s quite possible Marvell will loose business as Western consummates the deal, Gauna argues, because customers will switch to buying more gear from Seagate, at least for a time. “To the extent that diversification efforts this time result in a swing back towards Seagate, this time the effect would be negative,” given Western’s prominence as a Marvell customer, he writes.
Marvell’s stock fell 32 cents, or 2%, to $15.81. |
