Possible Hitachi GST End Game

Implications: • Sources indicate that Silver Lake Partners is looking into a possible investment in Hitachi’s disk drive division• Silver Lake was involved in an earlier investment in Seagate Technology taking them private and then public again a few years ago• Reported discussed stake in Hitachi by Silver Lake is less than 50%• An investment by a private equity group in part of Hitachi’s HDD group could be the beginning of resolving the long-standing losses in the division

Analysis:  Hitachi Global Storage Technology, the hard disk drive division of Hitachi, was founded in 2002 by the merger of IBM and Hitachi hard disk drive divisions.  Since the merger the company has not had an annual profit and few profitable quarters.  Hitachi has suffered from higher manufacturing cost structures than competing hard disk drive companies such as Seagate and Western Digital.  In addition the division has had difficulties in introducing new products, in particularly in the higher margin enterprise storage market (SCSI and fibre channel drives). 

Coupled with the competitive marketplace and a relatively mild but steady decline in drive prices it has been difficult for Hitachi to maintain their market share without selling below their cost and thus generating steady losses.   For several years Hitachi senior management has given the struggling division ultimatums and made some management changes but they have not succeeded in fixing the fundamental issues of the division or finding a way to off-load the unit. 

The intensity of the discussion about what happens next at HGST has intensified in the last year as industry observers think that Hitachi is moving towards making their moves to off-load all or part of the group.  The speculation has been that many companies as well as private equity groups have been interested in the company ranging from TDK/SAE (a Japanese/Chinese component supplier and contract manufacturer for the HDD industry) to LG (a Korean consumer electronics company).  There was even speculation that several companies already involved in the industry wanted to buy pieces of the company and break it up.  

Earlier in the Fall of 2007 new speculation began that private equity firms, including Silver, had been looking at Hitachi’s hard disk division.  Silver Lake Partners is an interesting suitor considering that they previously took Seagate Technology private and then public again earlier in the decade for an excellent return on their investment.   Having such a investment house take stock in the company may be part of trying to keep the division independent and at least partially intact. 

Whatever the ultimate move is going to be I expect it should be resolved in the next few months and will result in some or all of Hitachi’s not inconsiderable 17% hard disk drive market share up for grabs by the other players in the industry.  Stay tuned, more to come!