Western Digital Corporation (WD)
agreed to buy Komag, Incorporated
, which makes the crucial spinning media disks that record data inside hard disk drives (HDD), for $1 billion in cash.
The deal will make it easier for WD to manufacture its HDDs because it will no longer have to rely on separate arrangements with Komag, with whom it is a major customer.
Such self-reliance in the ultra-competitive HDD market is a major plus, according to John Coyne, WD President and CEO.
“Having our own internal media supply will enable us to compete more efficiently,” Coyne said on a conference call to announce the deal Thursday.
“The advantages of controlling our own destiny over the development and supply of our components, and being able to capture the synergies between them at the system level has become increasingly evident.”
WD’s buy will also strengthen WD’s market position versus Seagate and Hitachi Ltd., which make most of their own disks and recording heads. WD bought
Read-Write in 2003 to make its own recording heads. The Komag deal then will put WD on par with Seagate and Hitachi.
Moreover, WD will also control some of the media for its competition.
According to a research note from Baird, Hitachi
rely on Komag and other external media suppliers to supply extra finished media during peak cycles.
However, the Komag buy is not without its challenges. With a change in control, Komag is still obligated to provide Seagate and Hitachi with product until the end of those agreements – which extend for the next two to three quarters.
“We believe Seagate and Hitachi will continue to purchase a limited amount of product through Komag for the next few quarters,” Baird analysts said.
Ultimately, Baird expects these rivals will likely ditch Komag after a few quarters.
“With WDC’s acquisition of Komag, we expect both Seagate and Hitachi to rapidly shift business away from Komag to other suppliers Showa Denko, Fuji, and Hoya,” according to the Baird note.
After all, what competitor wants to give business to a rival if it doesn’t have to?
WD will also have to reconcile this bleak news from Komag: the vendor said it expects revenue for the second quarter of 2007 to be down 30 percent compared to the first quarter this year. Related to this, Komag also expects to incur a substantial operating loss in Q2.
Coyne declined to discuss Komag’s Q2 outlook on the call.
Komag shareholders will receive $32.25 per share in the cash tender offer.
Komag will become a wholly-owned subsidiary of WD should the deal close in the third calendar quarter of 2007 as expected.