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Seagate to Buy Xyratex

Zacks Equity Research

In a bid to strengthen its storage business, Seagate Technology (STX) is set to acquire Xyratex Ltd. (XRTX), a data storage technology provider for $374 million. The cash transaction represented a 27% premium to Xyratex’s Dec 20 closing price of $10.45 per share. Buoyed by the acquisition news, shares of Xyratex went up 27.3% on Monday’s trade and closed at $13.30 per share, above the proposed deal of $13.25 per share. Seagate’s shares, however, moved up moderately.

Xyratex Ltd. provides enterprises data storage platforms equipped with a wide range of advanced and scalable data storage solutions. The acquisition enables Seagate to test equipment for its hard disk drives (HDDs) and enables closer integration of its supply and manufacturing chain.  

The deal is also evident of the ongoing consolidation in the storage market. Specifically, the hard drive industry is getting smaller. The disk drive market is highly competitive, and has experienced drastic pricing pressure due to supply/demand volatility.

Moreover, hard disk companies might be vulnerable to additional pressures as customers such as tablet PC makers choose flash cards for storage purposes instead of the customary hard disks. The situation may compel companies to cut hard disk prices, which will hurt margins. In such a situation, companies can go in for acquisitions to further consolidate the market, lower costs and alleviate competition.

Seagate has a relatively strong cash generating ability that enables the company to look for strategic acquisitions that easily synergize with the current operations. In the last reported quarter, Seagate generated $682 million from operating activities, up from $394 million in the previous quarter. The company generated free cash flow of $521 million.

Moreover, Seagate is coming up with customized products to cater to new customers and penetrate markets. The company also has significant exposure to high-end corporate desktop and enterprise server markets, which will help it to compete with rivals such as Western Digital (WD), SanDisk (SNDK) and Fusion-io in the long run.

Nonetheless, the lack of visibility in the HDD industry and declining price environment are headwinds for the company.

Currently, Seagate has a Zacks Rank #3 (Hold).

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