RealTime IT News

Maxtor: The New King of Hard Drives

With PC makers announcing poor results, investing in the sector seems dicey -- if not insane. Such companies as Dell and Apple have been slashed by investors.

It looks like an even bigger leap of faith to invest in PC suppliers, such as disk drive makers. The disk drive business is an extremely tough business, subject to commodization.

Yet, the valuations in the sector are getting much more attractive, almost at fire-sale proportions. This week, Maxtor struck a deal to purchase Quantum's disk drive division. In the deal, Maxtor will take a one-time charge, which could result in as much as $180 million.

But the deal makes lots of sense. The combination will result in a company that has more than $6 billion in sales, thus making Maxtor the unquestionable leader in the industry, with more than 40% market share.

Of course, the combination will mean cost savings, as there are obvious duplications. Annual cost savings are expected to amount to between $120 million to $200 million.

There are also synergies. Quantum has a strong relationship with Matsushita-Kotobuki Electronics Industries (a partnership that has lasted 16 years), which will be a big help for manufacturing. Moreover, Maxtor has cutting-edge manufacturing practices (called the cell-based approach).

There will be new market opportunities. Maxtor, for example, has a family of products for network-attached storage (NAS), a fast-growing market. There will also be strong growth for server appliances and Intel-server drives.

Perhaps most importantly, the merger will help reduce the pricing problems of the industry. After all, the new company will have much more market power.

Finally, the balance sheet is strong, with about $1 billion in the bank account. So, with Maxtor sitting at a market cap of $1.2 billion, the company does look like a strong long-term value.