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Last updated: April 19, 2011 7:01 pm

Samsung to sell HDD unit to Seagate

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Samsung Electronics, the world’s largest memory chipmaker by sales, said that it would sell its hard disk drive business to Seagate Technology for $1.38bn in order to focus on memory chips.

The transaction, announced on Tuesday, is certain to attract attention from regulators around the world as it would reduce the number of companies making hard disc drives to just three – Seagate, Toshiba and Western Digital. The deal will take the form of 50 per cent stock and 50 per cent cash, giving Samsung a 9.6 per cent stake in Seagate and the right to nominate an executive to join the board of directors.

The deal also includes supply agreements under which Samsung will provide Seagate with Nand flash memory chips for its solid state drives, whose lack of moving parts offers a speedier alternative to the traditional spinning disc drives. Seagate will in return supply disc drives to Samsung for devices such as PCs and notebooks.

The deal is expected to help Seagate compete better with its enlarged rival Western Digital, whose market share would grow to nearly 50 per cent if its acquisition of third-ranked Hitachi’s HDD business for $4.3bn clears regulatory hurdles.

Samsung controls around 10 per cent of the market. A Seagate-Samsung combination would have a 40 per cent market share, leaving Toshiba as the only other participant, with about 10 per cent. But Seagate and Western Digital would argue with regulators that the increasing replacement of disc drives with solid-state flash memory in devices represents fresh competition. “I think the industry is still very competitive, you still have three very large, financially strong businesses,” Steve Luczo, Seagate chief executive, told the FT.

Samsung does not give a results breakdown for its hard disk drive unit but analysts say it is a lossmaking business.

“For Samsung, it was not a meaningful business anyway. There has been a question mark over how long the company will hang on to the lossmaking business whose business prospects are not so strong,” said Lee Sun-tae, an analyst at Meritz Securites in Seoul.

“We would view these meaningful industry moves to be positive with regard to sustaining rational competitive behaviour, supply/demand dynamics and overall industry profitability dynamics,” said Stifel Nicolaus of Stifel Financial in the US.

Industry watchers believe that consolidation will help improve profitability of the few players left in the market as the sector faces growing competition from new methods of storage used on devices such as the iPad.

HDD sales have fallen in recent years amid increasing popularity of tablet devices at the expense of netbooks, which use conventional hard drives. Tablets use faster, more power-efficient solid-state drives (SSD), which Samsung dominates along with Intel and Micron Technology. HDD shipments fell 4 per cent to 161m units in the first quarter, according to research firm IHS iSuppli estimates.

The sale of the HDD business is expected to provide Samsung with more financial firepower for potential acquisitions in new businesses. The South Korean company is trying to expand into new growth areas such as healthcare and alternative energy.

It recently bought a majority stake in local medical equipment maker Medison and its parent Samsung Group said in February that it will tie up with Quintiles, a US bio and pharmaceutical services firm, to set up a $264m contract manufacturer.

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