Updated from 10:47 p.m. EDT

Maxtor

(MXTR)

announced Wednesday that it would acquire rival disk drive maker

Quantum Hard Disk Drive Group

(HDD)

in an all-stock deal valued at $2.3 billion that would create the world's largest disk drive company.

Under the terms of the agreement, shareholders of the Quantum subsidiary will receive 1.52 Maxtor shares for every share of Quantum Hard Disk Drive Group's stock. The deal values each Quantum HDD share at $14.87, based on Maxtor's closing price Tuesday of $9.78. Quantum's HDD shares closed unchanged Tuesday at $9.56.

Maxtor finished Wednesday regular trading down 41 cents, or 4%, at $9.38. Meanwhile, Quantum HDD finished up $3.69, or 39%, at $13.25.

The combined company will retain both the Maxtor name and its current president and chief executive, Mike Cannon. The companies said the transaction is expected to be tax free to Maxtor and Quantum, with earnings per share expected to become accretive in early 2002. The newly combined company should generate as much as $200 million in annual savings within two years of the transaction's completion

"This is a bold and strategic step for both companies," said Maxtor's Cannon in a statement.

He added that the combined expertise, financial resources, and range of products make the combined company "exceptionally well positioned" to expand rapidly into other high-growth segments, including

Intel

(INTC) - Get Report

server drives, consumer electronics drives and server appliances.

The companies anticipate that the newly combined company will have annual sales of about $6 billion and a combined annual shipping rate of 50 million hard drives for use in a broad range of desktop PCs, Intel-based servers, and consumer electronics equipment.

Maxtor's network systems group will also be part of the combined company. The deal does not include Quantum HDD's storage systems group,

Quantum DLT

(DSS) - Get Report

, which will operate as

Quantum Corp.

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Both Quantum's HDD and Maxtor are now based in Milpitas, Calif., and each count

Compaq

(CPQ)

among their top customers. Compaq, along with fellow computer makers

Dell

(DELL) - Get Report

and

IBM

(IBM) - Get Report

, make up about 40% of Maxtor's sales now, according to

Hoover's Business Network

.

The

Hard Disk Drive Group

, one of Quantum's two tracking stocks, is the world's second-largest hard disk drive and tape drive producer (behind

Seagate

(SEG)

), according to Hoover's. The group's high-end and solid-state drives are designed primarily for the PC market, which accounts for about 85% of sales.

The Hard Disk Drive Group also makes disk drives designed specifically for use in TV recording devices and other consumer electronics. Besides Compaq,

Hewlett-Packard

(HWP)

is one of the group's top clients.