WDC to Divest HDD Asset to Toshiba - Analyst Blog

Hard Disk Drive (HDD) manufacturer Western Digital Corp. (WDC) recently entered into an agreement with Toshiba Corporation to divest some HDD assets. The to-be-acquired assets will enable Toshiba to manufacture 3.5-inch hard drives for the desktop and consumer electronics markets and will also facilitate the process of manufacturing and selling 3.5-inch hard drives for near-line (business critical) applications. However, the completion of the deal is subject to regulatory approval.

This recent deal is also subject to the completion of another deal, under which WDC will purchase the Toshiba Storage Device (Thailand) Company Limited (TSDT). This hard disk manufacturing company has significant assets in Thailand, apart from some other facilities and trained employees. This is a good business move on the company’s part as WDC can easily integrate the TSDT division with its manufacturing operation in Thailand.

The companies did not disclose the terms of the transaction but the aforementioned deals can prove to be accretive for them both.

This divestiture is made to address the requirements of regulatory agencies that have conditionally approved or are continuing to review the company's proposed acquisition of Hitachi Global Storage Technologies (HGST), the hard disk drive arm of Hitachi Ltd (HIT).

The HGST acquisition was announced by the company in March 2011, wherein WDC would be acquiring the wholly owned subsidiary of Hitachi Ltd. The deal was valued at approximately $4.3 billion Moreover, in December 2011; Western Digital announced that the Fair Trade Commission of Japan has cleared Western Digital’s application for acquiring Hitachi’s hard disk drive unit.

This acquisition is important for the company, as it aims to become a more customer-focused storage company with significant operational scale and a product suite that will enhance its competitive edge in the international market.

Moreover, for Western Digital, this buyout will help it attain the leading position in the hard drive market, brushing aside stiff competition from smaller hard drive and flash drive manufacturers that supply hard disk drives and related components to the likes of Apple Inc. (AAPL) and Nokia Corp (NOK).

The HGST acquisition is another indication that conditions are improving in Thailand and that WDC is on its way to reviving operations in the country. This would also be good news for most PC manufacturers that have seen rising costs and falling sales as a result of the events in Thailand. Moreover, the company is trying to lower its interest expense by reducing its debt burden.

Although Western Digital is cash rich, its cash generation ability has been tempered somewhat by the pricing environment. Intense competition in the hard disk manufacturing space and higher component costs are other headwinds for the company. However, we expect that the renewed interest in Thailand will help WDC improve its business fundamentals.

The company has a Zacks #1 Rank, implying a short-term Strong Buy rating.

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