Western Digital Corp. (WDC - Free Report) is counting the days to wrap up the acquisition of Hitachi Ltd.’s wholly owned subsidiary, Global Storage Technology (“HGST”). Last week, the top-tier hard disk drive (HDD) manufacturer received approval from the European Union (EU) that cleared all disputes regarding the takeover.
In March 2011, Western Digital signed a definitive agreement to take over HGST, for approximately $4.3 billion. The acquisition was intended to make Western Digital a more customer-focused storage company, with significant operational scale and a product suite that would make it more competitive in the international market. On the other hand, some industry experts believe that the combined entity may lose some market share, as several smaller players are supplying HDDs at competitive prices.
Regulators approved the deal only after Western Digital assured that it would sell off some its production assets, including a manufacturing plant, and transfer some intellectual property to the new unit. The sell-off guarantee confirms that small manufacturers will remain floated and Seagate Technology Plc (STX - Free Report) will not be the only rival of Western Digital. Last month, Seagate won EU approval for acquiring Samsung Electronics Co.’s storage business.
We believe the acquisition will help Western Digital to take the lead in the hard drive market, as the additional capacity would alleviate supply issues. Of course, neck-to-neck competition with hard drive and flash drive manufacturers that supply to companies like Apple Inc. (AAPL - Free Report) and Nokia Corp. (NOK - Free Report) should not be discounted. But we think that the company will now be able to focus better on other issues –– specifically the flood effect.
Western Digital has extensive operations (roughly 60%) in Thailand and appears to be the worst affected of the HDD manufacturers. The company stated that damage to its Thailand operations will make it unable to meet customer demand the rest of the year.
As a result, the December quarter sales and shipment guidance was lowered. Western Digital guided to a December quarter loss range of $1.10 to $1.50 per diluted share on a projected 55% drop in unit shipments.
The company expects a revenue range of $1.05 billion to $1.25 billion for the second quarter, compared to revenue of $2.69 billion reported in the first quarter of 2012. Reportedly, the company is expanding operations at its Malaysian plant to help cope with the situation.
While the adverse impact of the flood on Western Digital’s results is inevitable and has been telling on share prices, we think the approval of the HGST acquisition could be reason for cheer.
Currently, Western Digital has a Zacks #3 Rank, implying a short-term Hold rating.