Daniel Del'Re
Bill Watkins spurred rumors that a Chinese player is maneuvering behind the scenes to acquire a hard-drive maker. Investors and analysts say that a Japanese player rather than a U.S. one might be on the block.
Hitachi, for instance, already relies on Chinese suppliers and manufacturers for its hard-disk drive production. Bringing everything under the roof of a single Chinese owner would be the first step toward replicating the steps that have made Seagate and Western Digital successful. Technology may keep competitors at bay. Seagate's drives can come with attached flash memory, data encryption technology and software that not only stores data, but protects it and makes it easy to find. On balance, worries about flash memory and a competition-fueled glut of hard drives have caused investors to discount the sector. Judging by the ratio of stock price to earnings forecasts, valuations of Seagate and Western Digital were actually higher in the mid-1990s when a price war was hammering profits. "This is an industry that investors love to hate," says Needham's Kugele. "These stocks continue to trade on negative perceptions about seasonality, channel inventories and fears that flash is a replacement, not a complement. "But if this is as bad as it gets, the U.S. companies have a lot more staying power than their competitors in Asia."
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