Seagate Technology Corp plans to pay $1.9bn in stock to acquire Maxtor Corp in a deal that would create a company with 40% to 45% of the hard drive market, and combined annual revenue of more than $11bn.
Maxtor’s shares leapt 45.13% to $6.56 on news of the deal, though Seagate’s fell 2.04% to $19.20. Under terms of the agreement, Maxtor shareholders will receive 0.37 shares of Seagate common stock for each Maxtor share. This will give them 16% of the combined company, leaving the remaining 84% in the hands of Maxtor shareholders.
Seagate said the combination will create significant synergies and add 10%-20% to Seagate’s earnings per share after the first full year of combined operations. This will not be until 2007 because Seagate does not expect the agreement to close for at least six to nine months. While it expects to save $300m on expenses a year after the process of integration, $500m has been earmarked for costs, including severance payments.
Seagate CEO Bill Watkins said: With the increased scale of the combined company, we can reduce overall product costs and provide more innovative products at more competitive prices.
For his part, Maxtor CEO Dr CS Park, who will join the Seagate board, would not be drawn on whether it had discussed a merger with any other vendor, insisting it is committed to the Seagate deal. Maxtor will get a $300m payment if Seagate pulls out of the agreement.
Seagate acknowledged that revenue-attrition will result from the merger as OEMs look for alternative suppliers. However, it said the merged company would still be accretive even if it lost half of Maxtor’s revenue.
While Seagate is in good financial health, loss-making Maxtor has seen revenue stagnate. While Seagate spoke encouragingly about the quality of Maxtor’s engineers and its production facilities in China, there is little doubt that most of the cost savings will come from Maxtor’s side.
Seagate said it is sticking to its prediction that revenue in the December quarter will grow 17% to $2.2bn, with earnings per share in the range of $0.53-$0.57. It is also retaining its target of earnings per share of $2 in 2006.