Seagate Buys Samsung As Expected

Seagate Technology plc and Samsung Electronics Co., Ltd. have entered into a definitive agreement under which Seagate and Samsung will expand and strengthen their strategic relationship by further aligning their respective ownership, investments and key technologies.

Major elements of the agreement include:

Samsung combining its hard disk drive (HDD) operations into Seagate
Extending and enhancing the existing patent cross-license agreement between the companies
A NAND flash memory supply agreement under which Samsung will provide Seagate with its market-leading semiconductor products for use in Seagate’s enterprise solid state drives (SSDs), solid state hybrid drives and other products
A disk drive supply agreement under which Seagate will supply disk drives to Samsung for PCs, notebooks and consumer electronics
Expanded cooperation between the companies to co-develop enterprise storage solutions
Samsung receiving significant equity ownership in Seagate
A shareholder agreement under which an executive of Samsung will be nominated to join Seagate’s Board of Directors

The combined value of these transactions and agreements is approximately $1.375 billion USD, which will be paid by Seagate to Samsung in the form of 50% stock and 50% cash.

These transactions and related strategic agreements will enable both companies to better align their current and future product development efforts and roadmaps, accelerate time-to-market for new products and position the companies to address rapidly evolving opportunities in markets including, but not limited to, mobile computing, cloud computing and solid state storage. In connection with its strategic alliance with Samsung, Seagate expects also to strengthen its relationship with TDK Corporation/SAE Magnetics (H.K.) Ltd. Together, these transactions and agreements broaden a strategic relationship between Seagate and Samsung that began with a joint development agreement announced in August 2010.

"We are pleased to strengthen our strategic relationship with Samsung in a way that better aligns both companies around technologies and products," said Steve Luczo, Seagate chairman, president and CEO. "With these agreements, we expect to achieve greater scale and deliver a broader range of innovative storage products and solutions to our customers, while facilitating our long-term relationship with Samsung."

Seagate expects these transactions and agreements to be meaningfully accretive to non-GAAP diluted earnings per share and cash flow within the first full year following the closing, and Seagate does not expect any material restructuring costs in connection with them.

"Delivering value to the market and consumers is the primary goal of the extensive agreement announced today. Samsung looks forward to extending our existing strategic ties with Seagate, to deliver creative technology solutions for a broad diversity of consumer, business and industrial applications," said Oh-hyun, Kwon, president of the semiconductor business of Samsung Electronics.

The transactions and agreements significantly expand Seagate’s customer access in China and Southeast Asia. In addition, the mutual supply agreements enable Seagate to secure an important source of leading-edge NAND flash supply as the company expands its SSD and solid state hybrid product offerings, and position Seagate to be a more significant supplier of disk drives to Samsung. The agreement also gives Samsung a significant ownership position in Seagate.

Under the terms of the agreement, Samsung will receive consideration consisting of 50% Seagate ordinary shares and 50% cash. Upon closing, Samsung will receive Seagate ordinary shares valued at $687.5 million (45.2 million shares, or approximately 9.6% ownership of Seagate, which is based on Seagate’s 30-day volume weighted average stock price prior to signing), plus $687.5 million in cash. Samsung will have a right to designate a nominee to join Seagate’s Board of Directors following closing.

The agreement has no financing contingencies, and is subject to customary closing conditions, including review by U.S. and international regulators. The transactions are expected to close by the end of calendar year 2011.

Morgan Stanley & Co. Incorporated served as financial advisor and Wilson Sonsini Goodrich & Rosati, Professional Corporation served as legal advisor to Seagate in connection with the transaction. Allen & Company LLC served as financial advisor and Paul, Hastings, Janofsky & Walker LLP served as legal advisor to Samsung.

Comments

In our yesterday's comment, we bet on Seagate as a buyer and on a price of $1 billion or below.

Total price is finally $1.375 billion but Seagate will pay effectively $687.5 million in cash, the difference being in share transaction, Samsung getting a 9.6% significant equity ownership of Seagate, whose value corresponds exactly to the same amount, $687.5 million, and consequently getting a seat on the board.

At the end, it's a cheap price for a business whose the size has been officially revealed for the first time: $3.1 billion in revenue, 66 million units shipped during calendar year 2010, and a production capacity of 18 million HDDs per quarter. 66 million is more than the 80 million figure that we got from a Samsung's rep. No information was given on the operating results of Samsung HDD business, probably not profitable.

Commenting the deal, Seagate stated: "Because we have structured the transaction this way, we don’t anticipate significant layoffs or restructuring costs (…) Seagate expects these transactions and agreements to be meaningfully accretive to non-GAAP diluted earnings per share and cash flow within the first full year following the closing."

It's a good operation for Seagate that couldn't let a competitor acquiring this part of Samsung's activity and that will contort its position as number two worldwide manufacturer of HDDs behind WD/Hitachi GST.

Concerning the agreement on flash, the two firms were already working together for chips and also to co-develop controller for enterprise SSDs based on MLC NAND.

Few hours before the publication of this press release, some big customers of Samsung received the following letter signed by CH Lee and Changnam Chung, respectively VP marketing and senior director marketing from the HDD Division of the Korean company: "Today, our company has entered into a series of strategic agreements with Seagate Technology to broaden our relationship, including a definitive agreement under which Seagate will acquire our HDD business. We expect this transaction to close by the end of 2011, although it is subject to review by U.S. and international regulators. We will be conducting business as usual until close of the transaction, at which point we will do our best to facilitate your continued partnership with the HDD business. We look forward to your continuing cooperation and send sincere wishes for your future success."

Conclusion: there will be only three HDD manufacturers in the world at the end of calendar year 2011 when the deal is expected to close: Seagate, Toshiba and WD. It's good news for them but not really for all their customers with very limited choice of sources and probably less aggressive competition on prices.

We suspect that the next - and last - battle in the HDD industry will be for Toshiba, like Samsung in SSD and with roughly the same small market share (11%) in disk drives. The Japanese company will have better to wait one or two years before offering its disk drive business, after WD ingests Hitachi GST and being ready to re-invest. Between Seagate and WD, it will be an enormous fight to take the leadership of the sector. It may bleed and at a much higher price than $1.375 billion.

Real also:
Samsung Searches Buyer for Its HDD Business
Not really surprising