Hopefully this will be a good thing.
Seagate Technology, the digital storage giant, reached a deal Tuesday to acquire a rival, Maxtor, for $1.9 billion in stock, according to executives involved in the transaction.
The deal, which was approved by the boards of both companies, is expected to be announced as early as Wednesday, the executives said.
Seagate's acquisition comes as the market for digital storage is booming. Corporations and individuals are saving vast numbers of files that are ever increasing in size, especially with the rising number of audio and video files.
Still, the disk drive market--which has been on a faster technology track than the computer chip world as measured by the rate of increase of storage density--has been brutally competitive with dozens of foreign entrants keeping prices low.
Under the terms of the deal, Maxtor shareholders will receive 0.37 share of Seagate stock, the equivalent of $7.25 a share. That is a 60 percent premium over the price of Maxtor's shares, which closed Tuesday at $4.52.
When the deal is completed Seagate investors will own about 84 percent of the combined company and Maxtor shareholders about 16 percent.
For Seagate, the deal is not about filling a gap in its product line but rather is a gamble that it can utilize its manufacturing infrastructure to make Maxtor's disk drives at a lower cost. The executive said Seagate expected to create about $300 million a year in savings.
The transaction also fortifies Seagate's dominant position, but may raise questions among investors. Seagate, which was founded in 1979 and which was the first maker of hard disks for personal computers, has become an industry leader by pushing quickly for smaller drives and into new storage technologies.
But Maxtor lost money in four of the five most recent quarters and two of the last three years. The most significant challenge for Maxtor, based in Milpitas, Calif., is that it has not been a factor in the market for mobile disk drives, which are used in portable computers and in MP3 music players like the Apple iPod.
In the slower-growing but still strong market for desktop drives, Seagate has been the market leader followed by Western Digital and Maxtor.
The chief executive of Seagate, William D. Watkins, will run the combined company. Maxtor's chief executive, C.S. Park, will have a seat on the board, the executives said.
The Maxtor challenge
Seagate's fortunes have clearly turned around. In 2000, Seagate, then the world's largest disk drive company, was taken private in a complex $19 billion deal. At the time, Seagate had not been able to find a buyer despite its dominant position in the storage industry.
Seagate then returned as a public company in 2002, raising $870 million by selling 72.5 million shares, or 17 percent of the company.
Seagate had revenue of $7.55 billion in its most recent fiscal year ended in July. The company had income after taxes of $707 million.
Maxtor's revenue declined from $4.08 billion in 2003 to $3.79 billion last year and the company went from a profit of $128 million to a loss of $182 million. The company's situation deteriorated in 2004 when it faced challenges in manufacturing and designing its desktop computer drives, which led to a management shake-up in 2004.
The company's new management had been forecasting a recovery, but in October its shares fell 5 percent after it noted that it was having production problems. Until then, Maxtor revenues had increased 6 percent during the first three quarters of 2005 while its net loss had fallen.
The company had been experiencing solid growth in its business aimed at corporate buyers, and its gross margins had improved.