Contact: Scott Denne
While its competitor Western Digital aims to be the dominant player in flash, Seagate Technology sets itself up to profit from its privileged position as one part of a duopoly in the hard-disk drive market. The two different strategies are playing out in their respective M&A activity, including Seagate’s announcement today that it will buy Xyratex, a struggling maker of hard-disk capital equipment and enterprise storage modules, for $374m in its only acquisition of 2013.
All of Seagate’s recent deals (about one per year) build on a strategy of bolstering its position in the hard-disk drive market in anticipation that growing capacity needs among enterprises will continue to drive a growth in hard-disk sales that will more than offset declining PC sales. (Look for a two-part Impact Report in early 2014 for our take on Seagate’s strategy.)
That’s not to say that Seagate has completely ignored the flash market. In the last quarter it sold more than $100m in flash and hybrid disk products (or about 2% of its revenue). Earlier in the year it invested $40m in Virident, and we understand that it also bid to buy the company, but its offer came up about 10% short of the $685m that Western Digital’s HGST business ultimately paid. However, we gather that Seagate wasn’t interested in bidding for flash-caching providers that were picked up by other disk makers, such as FlashSoft, acquired by SanDisk, or VeloBit, acquired by Western Digital.
The purchase of Xyratex strengthens Seagate’s supply chain with the addition of more in-house manufacturing and testing products, as well as expands its footprint in the enterprise beyond disk drives as it will now be a supplier of storage modules and clustered storage gear for HPC markets. In valuing Xyratex at 0.3x trailing sales, Seagate assigns a multiple that’s in line with its previous two deals — drive maker LaCie (0.4x in May 2012) and Samsung’s hard drive business (0.4x in April 2011).
While Seagate seeks relative bargains on assets that can improve its position in a market that’s increasingly obsessed with costs, its main rival Western Digital has pursued more cutting-edge and expensive technologies. It has spent more than $1bn this year purchasing flash technologies, most notably Virident, which cost it 12.9x projected annual revenue.
For more real-time information on tech M&A, follow us on Twitter @451TechMnA.