Bloomberg let off a mini-bombshell yesterday: Western Digital apparently offered to buy Seagate in October.
At the time, world number one (by revenue) hard disk drive manufacturer Seagate was in the midst of resumed discussions with private equity buyers – led by TPG Capital – to go private. This is after initial discussions in September had foundered.
The subsequent discussions also foundered as the parties could not settle on an agreed valuation for Seagate. Bloomberg cites two sources saying WD, the world's number two HDD manufacturer by revenue – but number one by units shipped – offered to buy Seagate at a 10 to 50 per cent premium over the TPG price.
As TPG was said to be considering a $7.5bn bid, that meant WD was offering something in the region of $8.25bn - $11.25bn. Bloomberg has both Seagate and WD declining to comment: no surprise there. The business site speculates that any WD bid would have run into anti-trust problems as well as facing Seagate management departures and quotes an analyst saying it would have been a bad idea because of product overlap... duh!
Making hard drives is a numbers game and if a WD-Seagate combination could make the same number of disks they make now from better-optimised manufacturing processes, then the unit cost of each disk would be lower. It was the product overlap that made this feasible, because Seagate plants could fairly easily be modified to make WD drives and vice versa. WD would have seen substantial cost take-out opportunities in a combination with Seagate.
Loss of management would have been expected, but surely nothing that wasn't bearable. The anti-trust problem could have been a bigger issue, but with Hitachi GST IPOing next year, there would have been another US HDD manufacturer and Western Digitalgate would have faced competition from Samsung and Toshiba. It might have been a solvable problem.
Where does Seagate go now?
Under its previous CEO, Bill Watkins the eye was taken off the 2.5-inch HDD ball long enough for perennial no 2 WD to start catching up to Seagate in unit ship terms. The current CEO, and chairman, Stephen Luczo, has re-organised and spruced up the Seagate ship. Costs have been taken out but, even so, WD has still overtaken Seagate in unit ship numbers.
Seagate faces having its fast Fibre Channel drive enterprise business attacked on two fronts: by solid state drives that are much faster, and by SAS drives that are cheaper. Seagate's notebook business also faces blunted sales, as users either buy tablets with flash memory instead, or choose flash notebooks over ones with battery power-consuming hard drives that take longer to boot and load applications.
As SSDs become more affordable, it is reasonable to expect desktop PCs to start going the same way, leaving HDDs as devices that are promarily used for bulk data storage – and not as boot and application load devices or places to store active enterprise data.
Seagate does have its own SSD line, the Pulsar products, and has a deal with flash leader Samsung to co-develop controller technology, but Samsung would make the flash chip dollars with Seagate being just another channel partner for Samsung. We can't believe that the EVault backup and cloud backup storage business is going to replace the looming lost HDD revenues any time soon either, substantial though it is.
It is quite easy to paint a picture showing no way for Seagate but down, and concluding that Seagate's management has lost its way. It cleaned up the ship after Bill Watkins' tenure, but WD overtook it. Seagate then sought a future as a private equity-owned company. This too has failed, and a $2bn fund has been magicked up for share buybacks to keep dissatisfied shareholders happy.
This is the statement made about funding the buyback: "Seagate expects to fund the share repurchase through a combination of cash on hand, future cash flow from operations and potential alternative sources of financing."
Conclusion: it doesn't have the money now and can't fund it entirely from operating earnings. So it could be considering increasing its debt to buy its own shares. Is that what "alternative sources of financing" means? Is that a reasonable thing to do?
Wherever the money comes from it has ultimately to be paid for from operating revenues, and that depends on Seagate prospering. How is it going to do that? There is no plan that anyone can see above and beyond what it has been doing, the carrying out of which has led to WD over-taking it. This current plan, considering the pursuit of a private equity buyout, was apparently thought to be insufficient by Seagate's executive management and board.
Seagate is a world-class company with world-class products and operations that has, it appears, lost its way, and finds itself at a bit of an impasse. Its statement about the termination of the private equity talks concluded with these sentences:
The December 2010 quarter outlook does not include the impact of any potential new restructuring activities, any charges related to the aforementioned terminated discussions, future mergers, acquisitions, financing, dispositions or other business combinations the company may undertake. The company’s policy is to refrain from commenting on any such activities.
Mergers and acquisitions? Is Seagate thinking of merging with or buying WD? Could it look to buy SDD development assets? Does it have people looking at cloud storage and cloud storage access businesses?
Dispositions? What can Seagate dispose of? EVault? That wouldn't make sense as it is a future growth business and is doing well.
These cautionary sentences are a hint surely that Seagate's CEO and board are still thinking about what to do above and beyond making more disk and solid state drives at lower cost, and more finely targeted to market needs, than its competition. Do they have what it takes to achieve that? ®