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WD shells out for Hitachi storage – not all contractions lead to birth

It’s a very slow game of pass the parcel going on this week, with storage giant Hitachi Global Storage Technologies being sold for $4

By PETER WHITE

Published: 10 March, 2011

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It’s a very slow game of pass the parcel going on this week, with storage giant Hitachi Global Storage Technologies being sold for $4.3 billion to US long term storage number 2 Western Digital. The same unit was sold by IBM to Hitachi back in 2003 for just over $2 billion.

The move back then was very much about video and multimedia and ways to store it on portable devices and Hitachi went on to steal away the iPod deal from fierce rival Toshiba, which made the original 1.8 inch disk drives in the very earliest iPods. Hitachi provided a 1 inch drive to Apple back in 2004.

This new deal creates the largest disk drive maker in the world, with Western Digital already on the verge of overtaking Seagate Technologies, matching it virtually stride for stride. Both ship something close to 50 million devices per quarter and are reasonably profitable by around 10% of revenue, on sales between $2.5 and $2.7 billion each quarter. Now Hitachi will add some $6 billion of revenue a year to the Western Digital coffers, some $1.5 billion a quarter, making it by far the largest disk drive builder.

This is a grand consolidation and although there are many bit players in disk drives, we cannot see them sustaining their livelihoods going into the future. Toshiba, probably the next largest storage vendor has seen its disk drive business falter as its NAND flash memory grows, and only keeps it going to maintain a design edge for its notebook computers. But as Tablets take a hold, and there are further calls on Flash memory for portable devices, including smartphones, the fact that disk drives in handsets never took off, has pretty much taken the shine of this industry.

Disk drives in 2004 seemed set fair for continued dominance in portable devices and were expected to ship in millions into handsets. Instead Apple joined rivals in embracing flash memory initially for MP3 players , then later for handsets, tying up huge swathes of Flash memory with multi $ billion speculations. Flash memory got cheaper more rapidly than predicted, used less power and weighed less, and although pound for pound, megabyte for megabyte, disk drives remain more efficient than Flash, we must ask for how much longer.

As the 1inch disk form factor failed to take off in its predicted numbers, there would have been pressure on all of these disk makers who would have relied on Notebook, Netbook and enterprise storage provision. As Notebooks are now threatened with stagnation by use of the Tablet, volumes will go down, not up, and everyone is considering their options.

Hitachi’s move means that it makes a pretty big profit on the ownership of what once was IBM’s miniature storage division, taking $3.5 billion and 25 million shares in Western Digital, roughly 10% of its share ownership. The combined company will now have to extend debt by around $2.5 billion it says, because $3.1 billion was all the cash that it had in its coffers and it also needs working capital.

The resulting company will still be called Western Digital and remain headquartered in Irvine, Calif., under the leadership of CEO John Coyne. Hitachi GST chief executive Steve Milligan will become president of Western Digital.

Our feeling is that this is not the end of the fall from grace that disk drive companies will go through, and the technology, though safe within the enterprise for a while yet, is rapidly moving to a second place behind flash in portable markets, and must contract accordingly.

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