Seagate Technology (NASDAQ:STX) is to buy Samsung Electronics Co's loss-making hard disk drive (HDD) business for $1.4 billion as it looks to combat rival Western Digital Corp (NYSE:WDC) and arrest price wars that have damaged the industry.
The deal comes a month after Western Digital sought to buy Hitachi Ltd's hard disk drive unit -- a known price aggressor -- for $4.3 billion, to create a global leader with deep resources.
It is yet to be seen whether Western Digital trump Seagate as the world's largest hard drive maker after the deals conclude. In 2010, Seagate's sales was $11.4 billion while Western Digital posted revenue of $9.85 billion.
Toshiba Corp and Fujitsu are the other smaller players in the hard-drive space.
The sale of the HDD business will see Samsung exit from the cut-rate industry and focus on its bread-and-butter memory-chip business.
The sector is already battling persistent sales-growth declines and now faces a longer-term threat from wireless tablet devices using more power-efficient flash drives, or solid-state drives [SSD].
Seagate and Western Digital have been struggling to adapt to a future where fewer consumers tote laptops and many view flash drives as the future of the disk drive industry.
They are increasingly being built into laptop PCs and tablet computers such as Apple's (NASDAQ:AAPL) iPad and the HDD giants are also looking to enter the flash drive arena.
After the deal, Samsung will supply NAND-type flash chips to Seagate for use in its SSD products and it will source HDD from Seagate for its PCs, laptops and consumer-electronics products.
The deal will also help Seagate to gain access to Samsung's customer base across China and Southeast Asia.
Western Digital is also looking to reap the benefits of Hitachi's partnership with Intel Corp. (NASDAQ:INTC) that allows it access to the chipmaker's NAND flash technology -- an edge for Western Digital in a capital-intensive business.
Solid-state or flash market is now dominated by Intel, Micron (NASDAQ:MU), Samsung and STEC Inc (NASDAQ:STEC).
Samsung will receive 45.2 million Seagate shares worth $687.5 million, or about 9.6 percent of the company, and the rest will be paid in cash. With the deal, Samsung will become the second-largest shareholder of Seagate.
Seagate expects the deal to "meaningfully" add to its earnings per share and cash flow in the first full year following the closing.
It does not plan any material restructuring costs from the deal. Samsung aims to transfer the asset during 2011.
Morgan Stanley is the financial adviser to Seagate, while Allen & Company LLC advised Samsung.
Separately, Seagate reported third-quarter profit below market expectations on lower hard-drive shipments.
World PC sales unexpectedly dipped 1.1 percent in the first quarter, according to research house Gartner -- the first drop in two years.
SAMSUNG'S EXPANSION FOCUS
The sale would give Samsung, the world's largest technology firm by revenue, more firepower for acquisitions and expansion into new business areas such as healthcare and green energy.
"Samsung has become very flexible in M&A and it could be more aggressive in acquisitions," said Park Young-joo, an analyst at Woori Investment & Securities.
"But it is unlikely to snap up operations for its core businesses such as chips where it is already the world's No.1 player... it is more likely in new business areas."
Shares in Samsung, Asia's most valuable technology firm with a market value of $130 billion, closed up 0.9 percent prior to the announcement.
Seagate shares were up 3 percent at $18.30 in trading before the bell. The stock closed at $17.84 on Monday on Nasdaq.