Seagate Dumps Distributor

Irregularities are found in an incentive program.
Author:
Publish date:

Seagate Technology

(STX) - Get Report

has dropped its largest distributor amid allegations of unfair business practices, but what effect that will have on the hard drive makers financial picture is unclear.

According to a filing by Seagate with the

Securities and Exchange Commission

,

eSys Technologies

did not allow third-party auditors to examine records of its participation in Seagate's incentive program, "notwithstanding our contractual rights to do so. eSys officials also indicated to us that an audit would likely reveal irregularities in eSys' compliance with the terms of our incentive programs and other unspecified irregularities. In addition, eSys has failed to make full current payments on its obligations to us."

Caris analyst Shebly Seyrafi downgraded Seagate after the move was announced in a regulatory filing Tuesday, but other analysts saw the rupture with privately held eSys as good news. In any case, the news and the downgrade had only a modest effect on Seagate; shares lost 33 cents, or 1.4% to 22.77.

"Expect a modest near-term drag but

the decision is a long-term positive," wrote Deutsche Bank analyst Sherri Scribner. "eSys was likely not complying with Seagate's terms for tracking inventory in order to qualify for incentives, and we believe eSys has used aggressive pricing tactics inthe past," she wrote in a note to clients. Deutsche Bank does not have an investment banking relationship with Seagate.

Approximately 5% to 6% of Seagate revenue is derived from the eSys relationship.