Seagate to buy Samsung division for $1.375B

Santa Cruz Sentinel

SCOTTS VALLEY – In the latest consolidation announcement in the disk drive
market, Seagate Technology announced Tuesday it is buying the hard disk drive
business and other operations from competitor Samsung in a $1.375 billion, half
cash/half stock deal that is expected to be completed by the end of the year.

The “consolidation is really reflective of the needs of the industry to make
new investments in capital and technology to continue to provide these devices
that are in such huge demand,” said Steve Luczo, chief executive officer and
president of Seagate Technology.

During a conference call Tuesday with investors and industry analysts, Luczo
said the merger, which gives Seagate access to Samsung flash memory technology,
includes cooperative agreements for products and licenses and promises newly
co-developed products, expands and strengthens the strategic relationship
between the two companies. He described Samsung as “a pretty capital light
operation” that lacks scale but not design or manufacturing capabilities.

“By aligning in this way, we expect to achieve greater sales and deliver a
broader range of innovative storage products and solutions to our customers,
while facilitating our long-term relationship with Samsung,” he said. In
addition to improving market responsiveness, it will “hopefully” result in a
cost savings for customers.

Last month, Seagate competitor Western Digital Corp. announced plans to buy
Hitachi Global Storage Technologies for $4.3 billion.

The Samsung deal gives Seagate an important source of flash memory technology
known as NAND, which is increasingly used in smaller mobile electronics. The
agreements also make Seagate a more significant disk drive supplier to Samsung.
Lastly, the two companies will develop together new enterprise storage
solutions.

In addition to equity ownership in Seagate and a shareholder agreement, a
Samsung executive will be nominated to join Seagate’s Board of Directors.

“It’s not just about a mass number of scale,” Luczo said. “…I think it’s
important for everyone to realize though that Samsung is a very capable designer
and producer of hard disk drives and there’s a lot of technology ownership that
Samsung has both on the design side and on the production side.” Seagate will
“be able to bring elements of that over to our entire operation being able to
leverage across our portfolio.”

The transaction is to be financed with cash from the Seagate balance sheet as
well as equity. Although the merger translates to a major industry
consolidation, Luczo said he didn’t anticipate regulatory problems.

The industry consolidation is “more about creating business models that can
fund new technology going forward that our customers need,” Luczo said. “As a
result of a lot of issues, the demand for storages is accelerating.”

This year “is all about driving the product transitions and how to sustain
our ability to hold the gross margins higher,” said Patrick O’Malley, chief
financial officer of Seagate. “We’re still just focused on driving a cost
structure for the new products that will maintain it for a period of time.”
O’Malley said the deal would be “meaningfully accretive.”

While some of the deal is expected to be effective in the June quarter, other
aspects of the deal, driven by a regulatory approval timetable, are expected to
close by year-end.

Upon closing, Samsung will receive Seagate shares valued at $687.5 million
(45.2 million shares, or approximately 9.6 percent ownership of Seagate) plus
$687.5 million in cash.

This article appeared here.

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