The Deal: Western Digital Rebounds Following sTec Acquisition

NEW YORK ( TheDeal) -- Western Digital ( WDC) was gaining Tuesday, a day after the data storage equipment maker said it will acquire sTec Inc. ( STEC) for about $6.85 a share, or $340 million in cash as it seeks to expand its presence in the solid-state drive market.

Western Digital shares were rebounding 2.1% to $59.75, nearly erasing Monday's decline on news of the deal. STec rose a nominal 0.5% to $6.74 following $3.13, or 87%, to $6.72.

The transaction gives a 91% premium to Santa Ana, Calif.-based sTec's closing share price on Friday. Western's HGST subsidiary will absorb sTec.

The deal sidesteps a looming proxy fight for sTec. New York-based hedge fund Balch Hill Partners LP in a 13D filing and an accompanying letter dated June 10 urged shareholders to vote for its slate of nominees at the company's annual meeting set for July 12.

Balch Hill proposed Adam Leventhal, Clark Masters and Eric Singer as new board members to help boost the company's stock, and further asserted that current and former CEOs, brothers Mark and Manouch Moshayedi, have mismanaged the company, leading to dwindling revenue and a 91.3% decrease in share price since September 2009, when the target hit an all-time high of $41.30 a share.

The target nominated Mark and Manouch Moshayedi, and Matthew Witte for the board; Balch has heavily criticized their performance record in filings.

Manouch Moshayedi resigned as chief executive in September over insider trading charges. A disciplinary action by the Securities & Exchange Commission remains pending, according to the buyer.

The proxy campaign began in November when Balch Hill switched from a passive stance to an activist one and raised its stake from 6.4%, to 9.9%, joining forces with New York investment partnership Potomac Capital Partners LLC.

STec reported $103 million in net losses for the year ended Dec. 31, compared to $25.1 million in net income from the previous year. Revenue fell 45.3%, to $168.3 million, across the same period.

The purchase price represents a $207 million enterprise value for sTec, net of the target's cash as of March 31.

"The sTec acquisition is part of Western Digital's strategy to capitalize on the dramatic changes within the storage industry by investing in solid-state drives and other high-growth storage products," the buyer said. "The sTec acquisition enables Western Digital to accelerate its participation in the rapidly growing area of enterprise solid-state drives. STec has strong engineering talent and intellectual property that will compliment Western Digital's technical expertise and capabilities."

The deal should close by the fourth quarter, the companies said. Western Digital, of Irvine, Calif., said the purchase will be accretive after the first full year of ownership.

STec makes solid-state drives that are faster -- and costlier -- than traditional magnetic drives. The target has about 55 issued patents and 78 patent applications pending. All the patent rights are included in the deal.

Douglas Brengel, John Jinishian and Akhil Ahuja at Wells Fargo Securities LLC advised Western Digital. Steven Camahort, Richard Hsu, Stephen Hibbard, Patrick Robbins, Jeffrey Wolf, Daniel Stellenberg, Lisa Lopshire, Zheng Bao and Jason Allen at Shearman & Sterling LLP were legal counsel.

David King, Shawn Liu and Nick Tuosto of Bank of America Merrill Lynch advised sTec on the deal.

Written by Thomas Zadvydas in New York

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