The world’s largest hard drive manufacturer, Western Digital (NASDAQ:WDC), announced this morning that it will buy Hitachi (HIT) Global Storage Technologies for about $4.3 billion in cash and stock.
In 2010, disk drive manufactures shipped 653 million drives ─ Western Digital shipped about 200 million; Seagate Technology (NASDAQ:STX), the number two manufacturer after Western Digital, shipped about 195 million; and Hitachi, the number three maker, shipped about 112 million. After the acquisition, there will be only four major players in the market ─ Western Digital, Seagate, Toshiba, and Samsung. Toshiba has approximately 11% of the market share and Samsung has about 10% of the market share.
The market viewed the acquisition positively as Western Digital rocketed up 15.56%. Research at The Arora Report shows that the real winners are not Western Digital and Hitachi, but two other companies.
Marvell Technology Group
Marvell Technology Group (NASDAQ:MRVL) is the premier supplier of semiconductors for hard disk drives. The company’s product line covers the entire gamut including processors, read channels, transceivers, cryptographic engines, HDD preamplifiers, and HDD motor controllers. The company has a history of innovations in semiconductors for disk drives. Marvell was the first company to design the gigabit all-CMOS channel and the serial ATA interface. These two developments changed the landscape how computers read and process stored information.
Historically, Marvell has received over 50% of its revenues from the storage business. Western Digital is one of Marvell’s largest customers. Marvell has not had the same success with Hitachi. With Western Digital’s management in control of Hitachi, Marvell has real potential to substantially increase its business in the storage segment.
Costs at Hitachi have been higher than those at Western Digital. Western Digital is likely to move fast to reduce costs in the acquired business. The gains for Marvell will not be far behind.
Seagate will benefit in three different dimensions. First, elimination of a major competitor may lead to a more rational pricing environment in the industry. Lately, Hitachi has been the price aggressor.
Second, as a matter of policy many of the large, hard drive buyers insist on a second source. The purpose of this policy is to maintain leverage against the vendors and not be severely impacted by supply chain disruptions at one vendor. Western Digital and Hitachi have been the second source for a large chunk of the market. With Western Digital acquiring Hitachi, the remaining vendors are likely to receive increased second source business. Because Seagate controls about 30% of the market, it is likely to be the major beneficiary.
Finally, there have been persistent rumors of a private equity buyout of Seagate. As the market participants start realizing this in the new disk drive landscape, cash flow at Seagate will increase and a takeover premium will rapidly build in the Seagate stock price.
We will initiate long positions in both stocks when all six screens of the ZYX Change Method are satisfied. In the case of Marvell, we will need to take into account how it is fairing against the new competition from Nvidia (NASDAQ:NVDA) and the market share issues at one of its big customers, Research In Motion (RIMM). These considerations will affect three of the six screens of the ZYX Change Method. Tentative prices to start scaling in long positions in these two stocks to generate maximum alpha are described here.
Additional disclosure: Potential entry prices are described at blog.theAroraReport.com