Toshiba's HDD buy a good move, analysts say

Purchase of Fujitsu unit will put vendor in number one spot

With the acquisition of Fujitsu's hard-disk drive (HDD) business, Toshiba will position itself to become a leading contender in the enterprise-class solid-state disk (SSD) drive market, industry observers say.

It will also initially leap to the head of the pack in the 2.5-inch HDD space.

Toshiba and Fujitsu have signed a provisional agreement under which Toshiba will acquire 80% of Fujitsu's hard-disk drive business. The deal is expected to close during April.

Fujitsu will hold onto 20% of the business for an unspecified period, in order to smooth the transition of the business to Toshiba.

Fujitsu is a leader in enterprise-class 2.5-inch HDD market, as well as in mobile devices. The fast-growing 2.5-inch drive marketplace includes Hitachi, Seagate, Western Digital, Fujitsu, Toshiba and Samsung. Fujitsu ranks third in number of units shipped, ahead of Seagate, says Tom Coughlin, an analyst with Coughlin Associates.

Last year Fujitsu shipped 38.6 million 2.5-in HDDs. Only Hitachi, with 50.4 million, and Western Digital, with 50.3 million, shipped more. Toshiba followed Fujitsu with 34.5 million, and Seagate trailed with 29.8 million units shipped.

Western Digital had also been in talks with Fujitsu to buy the HDD business. That deal was estimated to be worth US$945 million (NZ1.5 billion). The value of Toshiba's Fujitsu buyout was not disclosed.

Coughlin and Gregory Wong, an analyst with Forward Insights, say the deal between Western Digital and Fujitsu fell through because there was no cultural synergy between the two companies, and because converting US dollars with Japanese Yen would have made a buyout more difficult.

While a leader in the hard disk drive market, Fujitsu has been losing money on its products because its costs to produce drives are too high, Coughlin says. "It has some similarities to the issues Hitachi was having. They had a high cost structure for building drives, which put them at a disadvantage to a Western Digital or Seagate," he says.

Toshiba, on the other hand, has been profitable in the HDD marketplace for the past 30 years. 2009 will be its first unprofitable year, the company says.

With the acquisition of Fujitsu's 2.5-inch HDD business, Toshiba, which sells its hard drives mainly into the consumer laptop marketplace, will effectively be catapulted into first place in unit shipments, Coughlin says. And, with Fujitsu's 20%-25% share of the enterprise 2.5-inch HDD space, Toshiba gets an instant business customer base.

Scott Maccabe, general manager of the Americas for Toshiba's storage business, says "We have been investigating entering the enterprise space for some time. We did our due diligence of what it would take to expand our market share.

"The logic made it more reasonable for us to acquire that rather than develop it in-house," he says.

One market that has escaped Toshiba is enterprise-class SSD drives, the fastest growing segment of the flash drive marketplace. Toshiba invented NAND flash memory, but for all of its innovation in the space, the company has only two SSD products based on NAND — one for laptops, the other an enterprise-class drive.

Maccabe says the Fujitsu acquisition would open an instant door into the enterprise-class SSD market because of the depth of Fujitsu's existing enterprise-class business customers. Forward Insights' Wong agrees.

"I think for Toshiba, they need to make sure their solid-state disk unit and hard-disk drive unit work together," he says.

Even with the many synergies between the two companies, Maccabe says he doesn't expect layoffs to result from the buyout. Fujitsu and Toshiba both sell into the mobile market place, but Maccabe says overlap is minimal.

For example, Toshiba has a 1.8-inch hard drive line and Fujitsu does not. Fujitsu has an enterprise-class HDD product line; Toshiba doesn't. And, while both companies have 2.5-inch HDD lines, any overlap would be leveraged "into efficiency and scale". Maccabe says.

"We're committed to bringing everybody over," he says.

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