Western Digital Buys Hiatchi Disk Biz for $4.3 Billion

March 14, 2011 Timothy Prickett Morgan

The disk drive business created by IBM in 1956, which found itself sold to Hitachi back in June 2002, has a new home: Western Digital.

Under the deal announced last week, Western Digital is paying $3.5 billion in cash and $750 million in stock to acquire Hitachi Global Storage Technology. That will give parent company Hitachi a 10 percent stake in Western Digital when the deal is done. The transaction is expected to close in the third quarter of this year.

While solid state drives (SSDs) and other kinds of flash memory are making all the headlines these days, back in the data center the dominant form of storage for data in use (as opposed to data stored for long-term retrieval) is still the disk drive. And that is why the further consolidation in the disk drive business matters to IBM i shops.

Back in 2002, IBM and Hitachi took their respective disk drive businesses and merged them together to create Hitachi GST, which married IBM’s very good giant magnetoresistive (GMR) disk head technology but its bad reputation during the 10K RPM and 15K RPM drive generations with Hitachi’s enthusiasm and good name in the disk biz. Hitachi paid IBM $2.05 billion to acquire IBM’s plants, a lot of its patents, and took on 18,000 employees, adding its own stuff and 6,000 employees to create Hitachi GST, which in the first year had just under $4 billion in disk sales. Over the following three years, Hitachi GST bought IBM out of its stake in the business. IBM continued to source disks from Hitachi GST for its Power-based servers, and still does; it also sources disks from Seagate Technology, and possibly others. (IBM is not very forthcoming about this information.)

Western Digital was founded in 1970 as a maker of chips, eventually moving into floppy and disk storage controllers, including the ATA interface that it co-developed with Compaq in 1986. Western Digital is no slouch in terms of technology or economic size–it already has its own line of enterprise disks, to which the Hitachi GST products will be added to, and it raked in $9.85 billion in revenues and $1.38 billion in net income in its fiscal year ended in July 2010.

In the fiscal 2010 year ended in the same month, Seagate had $11.4 billion in sales and $1.61 billion in net income. Hitachi GST had sales of 526.8 billion yen in calendar 2010 and an operating income inside of Hitachi of 57.2 billion yen. That is about $6.4 billion in U.S. dollars in revenues at current exchange rates and about $700 million in operating earnings.

Clearly, Hitachi GST was having trouble turning a buck on disks, competing with Western Digital and Seagate. But the combination of Western Digital and Hitachi GST should be larger than Seagate and the trick will be extracting a lot more profits from the combination.

Hopefully that will not mean that Western Digital and Seagate start cutting corners to reduce prices and compete with each other. That would be very bad for data center customers and consumers alike. With Toshiba et the disk business of rival Fujitsu, back in early 2009, and at the time this combination made Toshiba a solid number three, with $7.7 billion in revenues, and leapfrogging Hitachi GST and Samsung Electronics.