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Ebb Tide at Seagate

The stock falls on worries about the Maxtor deal.
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Investors are giving

Seagate Technology

(STX) - Get Seagate Technology Holdings PLC Report

a haircut, as concerns over weak guidance, slipping margins and a pending acquisition outweigh the hard-drive maker's solid third quarter.

In recent trading on Wednesday, shares were off $1.74, or 6.3%, to $25.78.

Bear Stearns analyst Andrew Neff downgraded the stock from outperform to peer perform, citing price erosion, lower-than-expected margins, an increase in channel inventory and the pending integration of



. Neff said that deal could lead to "near-term dislocation." (Bear Stearns does not have an investment banking relationship with Seagate.)

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Other sell-side analysts sounded similar themes, but it's worth noting that the general tone on the buy side wasn't terribly negative. "We continue to like the STX story, but would become more constructive once we get through the messiness of the next couple of quarters driven by seasonality and the Maxtor acquisition," said Goldman Sachs analyst Laura Conigliaro, whose company has an investment banking relationship with Seagate.

A manager with a major position in the stock noted that shares of Seagate had run up by about 14% since early March, and Wednesday's losses represented a retreat from a strong position. "There is a lot of nervousness about how the Maxtor acquisition will shape up," he added.

Late Tuesday, the Scotts Valley, Calif., storage-product maker said it earned a third-quarter profit of $274 million, or 53 cents a share, on revenue of $2.3 billion. Included in the results was an expense of $21 million related to the expensing of stock options and a one-time $7 million gain from an investment.

A year ago, Seagate posted a profit of $229 million, or 45 cents a share, on sales of $1.97 billion.

Analysts polled by Thomson First Call were expecting a 52-cents-a-share profit on sales of $2.25 billion.

Seagate said it shipped 4.7 million drives into the consumer electronics market, an increase of 12% year over year and 38% sequentially. Shipments for digital video recorders were up more than 100% year over year to 2.5 million units.

CEO Bill Watkins said the March quarter was emblematic of a fundamental shift in the storage market. "Change is being driven by the growth of digital content, both for commercial and personal use." Last year's March quarter, he said during a conference call with analysts, had been the best third-quarter in Seagate's history. But strong demand in the just-completed quarter propelled Seagate to a record shipment of 29.4 million hard drives.

Shipments of drives for mobile computing grew to a record 3.8 million, an increase of 112% over last year, the company said.

Looking to the current, or June quarter, Seagate expects to report revenue ranging from $2.1 billion to $2.25 billion; analysts were looking for $2.23 billion. Seagate expects a profit of 46 cents to 49 cents a share excluding option expenses, which would reduce the profit by about $23 million, or 4 cents a share. Wall Street was expecting a 49-cent profit.

Earlier this month, Maxtor announced that it will miss its first-quarter financial targets and said it will cut 900 jobs in Singapore. The ugly meltdown, which includes a per-share loss that's more than double analysts' estimates, is the result of slow sales and customer defections brought on by the company's pending acquisition by Seagate, the company said. The deal is expected to close by July, pending shareholder and regulatory approval. A May close is still possible, Seagate said.