October 4, 2000 2:20 PM PDT

Maxtor buys rival Quantum to become biggest drive maker

Disk drive maker Maxtor announced today that it will buy Quantum's hard drive business in a deal that will create an industry-leading hard drive maker worth approximately $2 billion.

Maxtor chief executive Mike Cannon will be CEO of the combined company, which will retain the Maxtor name.

With the merger, Maxtor will likely leap to first place in the drive market, surpassing longtime rival Seagate Technology, but it's a victory amid spoils. Despite a booming storage market and strong PC growth during the past three years, hard drive manufacturers have been battered by low prices, declining profit margins and layoffs.

In March, for instance, Seagate was broken into two parts, with the hard drive group becoming a private concern once again. Still, the increasing need for storage in e-commerce and new consumer devices that depend on hard drives, such as the digital VCR, could open new markets.

The stock transaction, in which shareholders of Quantum's hard drive business--Quantum HDD--will receive 1.52 Maxtor shares for every Quantum HDD share. Based on current prices, that puts the purchase price of the company at more than $1 billion.

The transaction will be tax-free to both companies and their shareholders, Cannon said this morning in a conference call.

Maxtor expects to incur a one-time charge related to the merger between $100 million and $180 million. In the long term, the company said it expects to see annual savings between $120 million and $180 million within 18 to 24 months following the transaction's close.

The combined companies should ship 50 million hard drives annually, with annual revenue of $6 billion and market capitalization of about $2 billion, Cannon said.

At the close of regular trading, Maxtor shares were down 53 cents from the opening price, or about 5 percent, to $9.25. Quantum HDD shares climbed 37 percent to $13.13.

The sale affects only Quantum's hard drive operation, according to Quantum chief executive Michael Brown, who will join Maxtor's board. On completion of the merger, Quantum's storage systems and digital tape drive businesses will operate as a separate, standalone company under the Quantum Corp. name, he said.

Brown will head the new Quantum operation, which expects to incur additional one-time charges for the conversion of employee stock options. The storage-systems tracking stock will be renamed as Quantum Corp. stock.

Through the merger, the two companies hope to stay strong in an increasingly competitive personal storage market, in which a declining price per megabyte has sapped profits and forced a shakeout among leaders.

Despite solid operational performances, Brown said, both businesses found growth and financial return "constrained by industry dynamics that neither company has been able to overcome on its own."

The companies hope to benefit from streamlined and more cost-effective manufacturing and to position themselves for growth into new markets, such as hard drives for consumer electronics.

"Maxtor and Quantum HDD (the hard drive unit) together has a complementary range of products that extends from drives for internal PC customers to more performance-oriented, high-capacity desktop products," Cannon said.

Neither company had been able to match rival Seagate, which led the hard drive market during the first quarter, according to market researcher Dataquest. Seagate had a 21.4 percent share of the market, compared with Quantum's 17.7 percent. Fujitsu and Maxtor were in a dead heat for the third spot, with 13.5 percent each.

Little changed from the first quarter of 1999 for Seagate, Quantum and Maxtor, which respectively had 19.9 percent, 17.3 percent and 13.4 percent of the market. In that earlier period, however, IBM held the No. 3 position in the first quarter of 1999 with a 13.7 percent share, according to Dataquest.

Surprisingly, one hard drive rival sees the merger as a good thing.

"First and foremost, I think this is a very positive event for the drive industry. It was pretty clear that the industry could not operate the way it had been without a structural change," said Matt Massengill, chief executive of Western Digital.

Like other drive makers, falling PC prices have lowered Western Digital's margins even as demand for storage increases.

"It?means there is one less company on the market floating bids to the customers," Massengill said.

While Massengill praised Maxtor's CEO, he said the transition is bound to erode market share. "No matter how you slice it, there will be some loss of share, and we undoubtedly will receive some of that."

Besides focusing on hard drives sold directly to PC makers or through retail, the new Maxtor will step up its focus on the network-attached storage market, Cannon said. It also hopes to tap combined engineering resources "to sustain investments in Intel server-class drives, consumer electronics drives (and) small-form-factor drives."

The merger is contingent upon regulatory and stockholder approval. Hyundai Electronics, which holds a 35 percent stake in Maxtor, has agreed to vote in favor of the transaction.

 

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