EVENT FLASH W E S T E R N Digital Acquires Hitachi GST: WD Gets Bigger, the HDD Industry Gets Better John Rydning

EVENT FLASH W e s t e r n Digital Acquires Hitachi GST: WD Gets Bigger, the HDD Industry Gets Better John Rydning

IN THIS EVENT FLASH

IDC assesses the joint announcement by Western Digital and Hitachi GST that Western Digital will acquire HGST in a cash and stock transaction valued $4.3 billion.

SITUATION OVERVIEW

In a major joint announcement made Monday, March 07, 2011 by Western Digital (WD) and Hitachi GST

(HGST), WD will acquire HGST in a cash and stock transaction valued at $4.3 billion. Assuming the deal receives regulatory approval, the number two and number three hard disk drive (HDD) companies in terms of revenue share will combine and emerge as the largest HDD company in a much consolidated HDD industry. For storage and server OEMs, and cloud storage providers the acronym "WD" will become as common in the lexicon as "Seagate" and "Intel".

As most everyone knows, Hitachi is a very large company with a very broad product portfolio including consumer products like appliances and AV products, as well as business products that range from information technology to power tools to industrial equipment. Two Hitachi subsidiaries directly related to information technology include Hitachi Data Systems (HDS), and HGST (Hitachi Global Storage Technology). These two divisions of Hitachi are completely separate with different missions.

HDS has an enterprise storage product portfolio around IT and assists organizations transform raw data into valuable information by making it more accessible and simpler to manage.

HGST, on the other hand, has been manufacturing HDDs since the late 1980's. Hitachi acquired IBM's HDD division back in 2003, and in 2010 shipped nearly 115 million drives, earning a 17.5% unit market share worldwide.

Like most major acquisition announcements, key details about how WD will integrate product roadmaps, product development teams, sales and marketing teams, and operations will become apparent over time. However, WD has a track record of successfully integrating acquired companies quickly and effectively. In the past ten years, WD acquired Fujitsu's desktop 3.5in HDD business, and large HDD component suppliers such as Read Rite, Komag, and Hoya's disk media operations. It also acquired Silicon Systems in 2009, a leading SSD supplier in the network-communications, industrial equipment, medical, aerospace and military markets.

The acquisition of HGST will clearly be WD's most formidable integration challenge to date. Both companies are large organizations, with offices and operations spread over seven countries. But the integration challenge will be eased somewhat given that Steve Milligan (HGST's current CEO, already named to become President of WD post-acquisition) was CFO at WD from 2004 to 2009. Additionally, Don Blake, HGST's senior vice president of operations, was an operations executive at WD for 12 years, including 7 years as vice president of WD's Asia HDD operations. At a senior management level, these two companies know each other well, which should help to speed the integration process.

WD's acquisition of HGST immediately catapults the company into the number two position in the lucrative enterprise HDD segment where demand for HDDs that are used in enterprise and cloud storage is highly certain, strong, and growing at a faster rate than the overall HDD market. WD was struggling to gain a foothold in this market organically, but will now be poised to compete with Seagate and Toshiba with a broad HDD and SSD product portfolio, and a strong customer support staff.

The challenge for WD will be to prove to its customers that it should be rewarded with close to 50% HDD unit market share. The near-term opportunity for Seagate, Toshiba, and Samsung is responding to potential rebalancing of HDD purchases by major OEMs and distributors as some of WD's customers may seek to avoid being over-dependent on one supplier, WD.

For HDD industry customers, WD's acquisition of HGST might appear at first glance to weaken their pricing power at the negotiating table. But there is more at stake long term given that the HDD industry is facing technical challenges with increasing the storage capacity per disk in a disk drive. There is a roadmap to overcome these technical challenges, but it will be expensive, requiring major capital outlays over the next

three to four years. In this context, HDD customers can take comfort knowing that there will be at least two Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com F.508.935.4015 P.508.872.8200 USA 01701 MA Framingham, Street Speen 5 Headquarters: Global HDD vendors with the scale and capital to make these investments, thus ensuring that lower cost HDD storage will be available in the future.

Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or [email protected] for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Visit us on the Web at www.idc.com. To view a list of IDC offices worldwide, visit www.idc.com/offices.