Seagate to Buy Xyratex for $374 Million (Updated)
Getting HDD test and high-end disk subsystems
This is a Press Release edited by StorageNewsletter.com on December 24, 2013 at 3:03 pmSeagate Technology plc entered into a definitive agreement to acquire all outstanding shares of Xyratex Ltd. in an all-cash transaction valued at $13.25 per share, or a total of approximately $374 million, including approximately $80 million in cash on Xyratex’s balance sheet as of August 31, 2013.
The consideration represents a premium of approximately 27% per share over Xyratex’s stock price at the close of trading on December 20, 2013.
Xyratex has developed HDD capital test equipment business. The acquisition of this business will strengthen Seagate’s vertically integrated supply and manufacturing chain for HDDs and ensure uninterrupted access to important capital equipment. The acquisition also expands Seagate’s storage solutions portfolio by adding Xyratex’s enterprise storage systems and HPC business.
Seagate will operate this business as a standalone entity and will focus on opportunities to improve and expand the business.
“This is a strategically important acquisition for Seagate as we continue to focus on delivering best-in-class storage solutions for our customers,” said Dave Mosley, president of operations and technology, Seagate. “As the average capacity per drive increases to multi-terabytes, the time to test these drives increases dramatically. Therefore, access to world-class test equipment becomes an increasingly strategic capability. As a premier provider of HDD testing equipment, Xyratex is an important partner and we are excited to integrate these important capabilities which will considerably streamline our supply and manufacturing chain for our core HDD business. We are also pleased to acquire Xyratex’s storage systems and high-performance computing business, which provides us additional opportunities to serve our customers with a broader array of storage solutions.”
“Xyratex is very pleased to become a part of Seagate’s industry-leading organization,” said Ernie Sampias, CEO, Xyratex. “Seagate shares our commitment to innovation and the critical role that test plays in providing the best storage products at the lowest possible cost. After a thorough strategic review process in which we evaluated a wide range of alternatives, the Xyratex board of directors determined that this all-cash transaction with Seagate maximizes shareholder value through an attractive premium, and also affirms the significant value that our employees have created.”
The transaction has been approved by Xyratex’s board of directors and is subject to customary closing conditions, including review by regulatory bodies and approval by Xyratex shareholders.
Baker Street Capital Management, LLC, Xyratex’s largest shareholder, has agreed to vote its shares in favor of the transaction.
The transaction is currently expected to close in mid-calendar year 2014.
Seagate expects to finance the transaction from existing cash balances and the transaction is not subject to any financing conditions.
Seagate currently expects the transaction to be neutral to Seagate’s earnings per share in its fiscal year 2015. Seagate expects positive cash flow immediately following the transaction and expects revenue contribution to be between $500-$600 million in its fiscal year 2015.
Allen & Company LLC served as financial advisor and Wilson Sonsini Goodrich & Rosati served as primary legal advisor to Seagate in connection with the transaction. Credit Suisse served as financial advisor and Latham & Watkins LLP served as legal advisor to Xyratex.
Comments
Founded in 1994 in an MBO from IBM, Xyratex is the last big European storage manufacturer, with HQs in UK, and R&D and operational facilities in North America, Asia and Europe. Another European one, smaller Tandberg Data, is going to be bought by Overland Storage.
It's the 29th acquisition of Seagate since 1984, the last one being LaCie in external disk systems for Apple users last year for $186 million.
After the announcement of this operation, market cap of Xyratex was at $365 million, not far from the low price of the deal.
Baker Street Capital Management, the largest shareholder of Xyratex with ownership of approximately 23% of outstanding common shares, was not happy at all with the results of Xyratex, estimating that its market price was much lower than its intrinsic value. That's why Steve Barber, CEO since 2003, was fired last April, and why the investor was searching a buyer.
Seagate is essentially interested by acquiring Xyratex for its excellent high-performance 3.5-inch HDD automated test systems and consequently to be more vertically integrated. Xyratex being the only independent maker in the world of these testing units for 3.5-inch drives, it's not good news for Xyratex' customer WD and Toshiba. The other sole competitor is Teradyne, but for 2.5-inch HDDs only at the moment with its Neptune line, and preparing to enter into 3.5 inch. For its last fiscal quarter, Teradyne records revenue of $25 million in system test.
Seagate was also a partner, as well as PMC, LSI and HGST, in 12Gb SAS storage system.
But this HDD capital equipment business is only 18% of Xyratex' revenue.
Enterprise storage solutions represent the main activity of the UK public firm but is deeply decreasing - 31% during last quarter - as it lost progressively its main customer, NetApp, following the acquisition of LSI/Engenio. For the most recent quarter, NetApp was only 22%, Dell 14%, IBM 35% and HP 13%.
Seagate never was successful in mid-range and high-end external storage subsystems. Remember Xiotech, acquired by Seagate in 2000 for $360 million. Then the former Seagate's subsidiary raised $40 million in capital in 2007 from a group of investors led by Steve Luczo, current Seagate CEO and chairman. Xiotech - now X-IO - never became a big name in storage subsystems.
"Seagate is unable to sell small number of products", told us a Seagate's executive.
That's right. So what's going to do the HDD maker with Xyratex' storage subsystems? Will Seagate keep this business where the company is competing with its OEM customers? The UK company has an innovative technology on storage cluster with great future, applied now to HPC, and that could be used in the future for lower end products.
Most recent fiscal 3Q13 financial results of Xyratex
| (in US$ million) | 3Q12 | 3Q13 | 9 mo. 12 | 9 mo. 13 |
| Enterprise storage solutions | 233.4 | 161.0 | 773.9 | 506.9 |
| HDD capital equipment | 52.3 | 56.3 | 119.5 | 122.2 |
| Total revenue | 275.7 | 217.3 | 893.5 | 692.1 |
| Growth | -21% | -23% | ||
| Net income (loss) | 7.7 | 2.4 | 25.6 | 0.2 |
* third fiscal quarter ended August 31, 2013
Revenue in the fourth fiscal quarter ending in November 2013 was projected to be in the range of $190 million to $220 million, including $160 million to $175 million for storage solutions and only $30 million and $43 million in HDD capital equipment. It means global annual sales between $697 million and $727 million for FY13, far from the record of $1,602 million in FY10. Between 2001 and 2011, the European firm grew at a CAGR of 25% before dramatically plunging.
Xyratex' milestones
- 1966: Beginning of business under IBM manufacturing HDDs
- 1980: Enters in storage systems
- 1994: Becomes independent following MBO
- 2002: Incorporated under the laws of Bermuda
- 2004: IPO on Nasdaq, raising around $50 million
- 2008: Revenues exceed $1 billion
- 2011: Enters in storage for HPC
Companies acquired by Xyratex
| Year | Acquisitions | Price* | Activity |
| 1995 | Peer Protocols | NA | Test equipment for SCSI protocol |
| 1996 | White Electronics | NA | Dutch warranty and repair of monitors |
| 1996 | BigByte Europe | NA | Floppy disk and warranty management |
| 1996 | Zadian Technologies | NA | Broadcast technology and design services |
| 2004 | ZT Automation | NA | Handling automation systems for hard disks |
| 2004 | Beyond3 | 1.3+ | Optical inspection system for HD manufacturing |
| 2005 | NetHelix (assets) | NA | HDD component test |
| 2005 | Oliver Design | 17.2 | HD media cleaning product |
| 2005 | nStor | 21.2 | Entry-level RAID controller |
| 2006 | Jastam Trading | 1.5 | Distributor in Japan |
| 2006 | Ario Data Networks | NA | Bladed storage solutions and RAID controllers |
| 2010 | ClusterStor | NA | Clustered and parallel storage system for HPC |
| 2010 | Optical Systems Corp. | 5 | Automated production technology |
| 2010 | Magnetic Recording Solutions | NA | HD media and head testing |
| 2013 | Oracle (assets) | NA | Lustre trademark, logo, website and associated IP |
* in $ million
Activities sold by Xyratex
| Year | Acquirer | Price | Activity sold |
| 1999 | Teleplan | NA | Warranty and repair |
| 2004 | GlassHouse Technologies | NA | Sagitta Performance Systems, in storage networking products and storage consulting |
| 2006 | Napatech | NA | 1GbE X-cards for network analysis |
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