Wed, Jun 05, 2002 page21

• Hitachi to pay US$2.1bn for IBM disk-drive unit

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  Hitachi Ltd will pay US$2.05 billion for International Business Machines Corp's hard-disk drive business, creating a company with a one-fifth market share as falling demand forces rivals to link up to cut costs.

  Japan's No. 3 chipmaker and the world's largest computer maker will initially create a new company. IBM will reduce its 30 percent stake in the venture over three years and then focus on data-storage systems and software, spokesman Scott Brooks said.

  Hitachi's shares fell as much as 4 percent on concern it won't pare costs enough to compete against Maxtor Corp and Veritas Software Corp, even as it challenges their leadership of the US$20 billion market.

  Hitachi's rivals are also consolidating with Maxtor buying Quantum Corp's disk-drive business in April last year and Veritas acquiring Seagate Technology Inc in November 2000.

  "The profitability of any hardware business is under pressure" because prices keep falling, said Sadaji Shibata, who helps manage about US$60 billion in assets at Daiwa Asset Management Co. "Hitachi should differentiate its devices but it's hard to see how it can do that."

  Hitachi shares fell as much as Japanese yen 38 to Japanese yen 908. The stock has fallen 26 percent in the past year as the company slid to a record US$3.9 billion loss in the past fiscal year. The shares of Armonk, New York-based IBM fell US$2.34 to US$78.11 before the sale was announced.

  Hitachi's overall hard-disk drive business broke even in the year ended March 31, according to spokesman Hirotaka Ohno. Losses in its 3.5-inch hard-disk drives were offset by profits in its 2.5-inch ones, he said.

  The company shipped 1.14 million 2.5-inch drives and 160,000 units of 3.5-inch drives in the period.

  Hitachi said the new company will have sales of US$5 billion in the year ending March 2004 and may grow to about US$7 billion by the year ending March 2007. It will supply hard-disk drives to Hitachi and IBM as part of a multi-year supply contract.

  Given IBM's leadership in hard-disk-drive technology and Hitachi's strength in next-generation vertical recording technology, IBM and Hitachi may pose a threat to their competitors, analysts said. Milpitas, California-based Maxtor had sales of US$3.8 billion last year.

  "Over the medium term, this is likely to present a serious threat to peers, considering the advanced technology of the two," Takatoshi Yamamoto and Tomohiro Murata, analysts at Morgan Stanley Japan Ltd., wrote in a report sent to clients after the purchase was announced.

  However, "most consider that Hitachi will have to work hard to successfully absorb the division," they also wrote.

  IBM and Hitachi said on April 16 they would form a venture to produce hard-disk drives, which raised speculation from analysts and investors that IBM was preparing to sell the unit. The sale agreement will result in Hitachi combining hard-disk drive research, development, manufacturing, marketing and sales into a single company.

  Tokyo-based Hitachi will own 70 percent of the venture and will take full control after three years. IBM facilities and about 18,000 workers will move to the venture's payroll, and the business is expected to have a workforce of 24,000, Brooks said.

  The drives are used in desktop and laptop computers.
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