Seagate Engulfs Maxtor

Seagate Technology's(STX Quote) $1.9 billion acquisition of rival hard-drive maker Maxtor(MXO Quote) removes a competitor whose penchant for price-cutting hurts margins and will allow the buffed-up company to enjoy considerable economies of scale.

What the deal announced early Wednesday doesn't do is give Seagate access to cutting-edge technology; in fact, Maxtor has missed the boat on two of the industries' hottest markets -- small drives for notebook computers and even smaller drives for use in digital gadgets such as Apple's (AAPL Quote) iPod.

Still, the cost synergies are notable. In the first year of the merger, Seagate expects to cut $300 million from Maxtor's capital expenditures budget of about $450 million. Other savings, including personnel cuts, have not yet been released, but analysts say they will be substantial.

The deal will push Seagate's share of the hard-drive market -- currently about 30% -- to 40% or even 45%, says Shaw Wu, of American Technology Research. But in the long run, its not likely that Seagate will be able to hold on to all of those gains.

"Major OEMs like Dell(DELL Quote) don't want to be too dependent on any one supplier," he says.

The same phenomena was apparent in earlier deals, including Hitachi's purchase of IBM's(NYSE Quote) hard-drive business and Maxtor's purchase of Quantum, which looked good on paper but did not turn out all that well, says Wu, whose company does not have an investment banking relationship with Seagate.

Moreover, the deal is likely to be scrutinized by antitrust regulators concerned about consolidation in the industry, and probably won't close until the second half of 2006, says Seagate CFO Charles Pope.

Seagate will exchange 0.37 of a share for each share of Maxtor.