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WDC Completes STEC Acquisition

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Hard disk drive (HDD) manufacturer Western Digital Corp. (WDC - Free Report) recently completed the STEC Inc. acquisition. Western Digital had announced the acquisition of STEC on Jun 24, 2013, for $340.0 million. STEC specializes in providing SSDs, flash cards and USB drives for enterprise applications, as well as DRAM products for computing, communications and embedded industrial applications.

Western Digital will incorporate STEC into its subsidiary Hitachi Global Storage Technologies (HGST). Thus, it will enhance HGST's existing SSD capabilities and expand its participation in the enterprise segment.

Western Digital has been expanding its presence in the solid state drive (SSD) storage market due to the sluggish demand in the PC market (which primarily relies on HDD). SSDs are now being used in servers due to the reduction in latency, which in turn helps in faster response to real-time applications. So focusing on SSDs for the enterprise segment looks like a smart move at a time like this.  

SSDs are expensive, but they are technically superior because of their speed and energy efficiency. They also occupy less space, which makes them more suitable for mobile computing devices. The emergence of thinner laptops and tablets over the past few years has created an ideal market for SSDs, but cost has been a limiting factor. It is possible that enterprise adoption will generate the scale necessary to drive down costs and make them more suitable for the lower-priced mobile devices.

Market research firm IDC anticipates revenues from SSDs to reach $7 billion in 2017 from $2.5 billion in 2012. Thus, the acquisition is a prudent move as it will help Western Digital strengthen its SSD portfolio and grab a better share in the promising SSD market.

Western Digital has been acquiring companies to strengthen its SSD lineup. The company recently announced the acquisition of Virident Systems Inc. for $685 million. The acquisition strengthens Western Digital’s position in the storage market, especially compared to peers SeagateTechnology (STX - Free Report) and Fusion-io, Inc. .

The company is well positioned to pursue more acquisitions given its healthy cash from operations of $684.0 million and the cash balance of $4.31 billion on its balance sheet at the end of the fourth quarter. While the launch of new storage devices will likely attract more customers, increased innovation will continue to push up R&D expenses, which could limit margin expansion.

Currently, Western Digital has a Zacks Rank #3 (Hold).

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