Western Digital Drives Hard: Tech Edge

NEW YORK ( TheStreet) -- Tech investors love a good old duopoly.

That would explain the big stock jump in the hard drive sector that followed Western Digital's ( WDC) announcement Monday to buy aggressive-pricing No. 3 Hitachi for $4.3 billion.

Western Digital climbed 13% on news of the deal, which was not a typical investor reaction to a costly outlay that exceeds the $3.1 billion in cash than the company has on its books. And perhaps even more odd, shares of Seagate ( STX), which stands to get crushed by this new super-competitor, rose more than 10% Monday.

The deal effectively kills the sector's most competitive rivals. Hitachi, for example, recently listed a 1-terabit external hard drive for $59, about half the price of similar devices from Seagate and Western Digital.

The pairing, if approved, would give Western Digital about 50% of the total hard drive market, Seagate 30% and both Samsung and Toshiba/Fujitsu would control 10% each, according to one Wall Street tech analyst.

Before:

After:

The hard drive sector is under a great deal of pressure. Not only are PC sales slumping, but the growth is headed toward solid state drives that power mobile devices like phones, tablets and, increasingly, laptops. To capture the dwindling business, the hard drive makers have had to endure painful price wars.

Some observers, like IDC hard drive analyst John Rydning, say the "consolidation should help to boost the industry's profitability -- or at least stabilize it."

Other analysts say the move might go well beyond stabilization. "The market reaction suggests that people see a chance for some collusion on pricing," says a Wall Street analyst. "I think we'll see a close look by the antitrust people."

PC parts suppliers have a colorful history, once consolidation has run to its natural limits. Look how healthy the competition between Intel ( INTC) and AMD ( AMD) has been.

Unfortunately, duopolies aren't always a sign of a dynamic industry, but more a symptom of a dying market.

--Written by Scott Moritz in New York.

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Editor's note: "Tech Edge" is a blog written and compiled by Scott Moritz, TheStreet's senior tech correspondent. The blog explores behind-the-scenes tech news, rumors and reports that Wall Street folks are talking about.

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