ED#29 : Seagate Speaks About Maxtor!

By the end of 2006, Maxtor will cease to exist! If you haven't heard it by now, Seagate has successfully acquired Maxtor. Take a look at the press release here :

Scotts Valley, CA, and Milpitas, CA, December 21, 2005 – Seagate (NYSE: STX) and Maxtor (NYSE: MXO) today jointly announced they have entered into a definitive agreement under which Seagate will acquire Maxtor in an all stock transaction. Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Maxtor shareholders will receive .37 shares of Seagate common stock for each Maxtor share they own. When the transaction is completed Seagate shareholders will own approximately 84% and Maxtor shareholders will own approximately 16% of the combined company. The value of the transaction is approximately $1.9 billion.

The combination of Seagate and Maxtor will build on Seagate's foundation as the premier global hard disc drive company, leveraging the strength of Seagate's significant operating scale to drive product innovation, maximize operational efficiencies, and realize significant cost synergies. These capabilities will enable the combined company to compete more effectively as the highly competitive data storage industry addresses the challenges and opportunities for significant growth that lie ahead. The combined company will be well-positioned to accelerate delivery of a diverse set of compelling and cost-effective solutions to the growing customer base for data storage products.

The combined company is expected to generate significant synergies, and the transaction is expected to be at least 10-20% accretive to Seagate on a cash EPS basis after the first full year of combined operations. As with other past combinations of disc drive manufacturers, revenue attrition is anticipated to result from this combination. Synergy estimates take into account anticipated revenue attrition. It is estimated that the incremental revenues will generate gross margins that are in line with the high end of Seagate's stand-alone model. In addition, the combined company expects to achieve approximately $300 million of annual operating expense savings in connection with the transaction after the first full year of integration.

"Seagate is excited about the opportunity to achieve greater scale, reduce supply chain costs, and leverage combined R&D efforts across a broader product set. With the increased scale of the combined company, we can reduce overall product costs and provide more innovative products at more competitive prices," said Bill Watkins, Seagate CEO. "We believe this is a strategic combination that will provide value for our shareholders as well as benefits for our customers."

"We believe this combination offers an exciting opportunity for our two companies to come together in a transaction that maximizes value for our stockholders, through the combination of an attractive premium and through future value enhancement of the combined company's operations," said Dr. C.S. Park, Maxtor chairman and CEO. "Together, we will leverage our combined technical resources to deliver to our customers an even more compelling and diverse set of products, and get them to market more quickly and cost effectively."

Steve Luczo, Seagate chairman, said "Seagate's board of directors is very enthusiastic about this unique combination and believes it will provide value for shareholders of both companies. This transaction has significant strategic and financial benefits, and the combined company will be better positioned to anticipate and serve the needs of the global customer base in the highly competitive data storage market."

Seagate's executive management team will continue to serve in their current roles. The combined company will retain the Seagate name and executive offices will be located in Scotts Valley, California. Dr. Park will become a director of Seagate upon the closing of the transaction. Seagate's chairman, CEO, executive vice presidents, and the principal equity investors affiliated with certain of Seagate's Directors have committed to vote their shares in favor of the acquisition.

The transaction is expected to be completed in the second half of calendar 2006, subject to obtaining shareholder approvals and customary regulatory approvals. There is a termination fee of $300 million payable to Maxtor under certain conditions. The transaction is intended to be tax-free to Maxtor shareholders.

Prior to the closing, Seagate and Maxtor will operate as separate businesses.

Seagate's previously announced outlook for the December quarter of $2.2 billion in revenue and earnings per share in the range of $0.53-$0.57, excluding non-cash stock based compensation, remains unchanged. Additionally, Seagate confirms its recently announced guidance for fiscal year 2006 earnings per share outlook of approximately $2.00, excluding non-cash stock based compensation.

Seagate Speaks About The Acquisition

Now, what does this mean for the market? The "loss" of a manufacturer like Maxtor would inevitably mean fewer choices in the market and less competition, potentially leading to higher prices. On the other hand, absorbing Maxtor may allow Seagate to reduce costs and pass the savings to customers.

More immediately, what would this merger mean to Maxtor customers? How much will they be affected as a result of Seagate's acquisition of the company that made their products? Will they still be entitled to the same warranty and service channels?

We had the opportunity to ask Seagate some questions about these questions. Let's take a look at what they had to say!

ARP : What will this mean for Maxtor? Will the Maxtor brand continue to exist?

Seagate : It's possible some of the branded solutions/retail products may maintain some Maxtor branding, but it's too early to tell. They're very strong in this space. We will retain the Seagate brand for all other products.

ARP : What will Seagate do with current Maxtor products? Will they be integrated into Seagate's product lines or phased out?

Seagate : Again, a little too early to tell, but we'll likely keep our line intact as they don't have any products that we don't already have.

ARP : What will Seagate's acquisition of Maxtor bring with it, in terms of technology and engineering expertise? Or did Seagate acquire Maxtor only for its manufacturing facilities, etc?

Seagate : They do bring engineering expertise, but primarily they have manufacturing assets that are particularly appealing.

ARP : How will this affect current Maxtor customers, as far as warranty and service & support are concerned?

Seagate : That will be figured out as we progress through the completion of the transaction.

ARP : What about current Maxtor distributors? Will they automatically become Seagate distributors, even in countries where Seagate has agreements with sole distributors?

Seagate : See answer above.

ARP : How will this affect Seagate's and Maxtor's workforce? Will there be any reduction in workforce?

Seagate : There is obvious overlap and redundancy. We'll address that as we get closer to the close. Seagate's management will remain in place. There are no planned Seagate workforce reductions as a result of this transaction.

ARP : How will this affect Seagate's and Maxtor's facilities? Will Seagate be closing any Maxtor facilities as a result of this merger?

Seagate : We'll integrate where it makes sense, primarily in China and their media facilities. Seagate's facilities will only be positively impacted by the acquisition.

Obviously, they still have a lot to work out until the transaction completes in the second half of 2006. Until then, Maxtor will continue to provide technical support for Maxtor products.

As for Maxtor's workforce, well, their fate are still unknown but if you see above, the emphasis seems to be on maintaining Seagate's workforce. It's likely that Seagate will absorb Maxtor's workforce and facilities where it makes most business sense. As for the rest...

So, will we still see DiamondMax hard drives in the market? Maybe, but they would likely be in the guise of a Seagate Barracuda.

Questions & Comments

Please feel free to post your questions or comments here!