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Seagate Closes Xyratex Buy

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Seagate Technology (STX) recently completed the acquisition of Xyratex Ltd. Seagate had announced the acquisition of Xyratex on Dec 23, 2013, for $374.0 million. Xyratex Ltd. provides enterprises data storage platforms equipped with a wide range of advanced and scalable data storage solutions.

The acquisition brings important test equipment for hard disk drives (HDDs) in-house, thus facilitating closer integration of its supply and manufacturing chain.  

The deal is also evidence of the ongoing consolidation in the storage market, which is highly competitive and has experienced drastic pricing pressure due to supply/demand volatility.

Moreover, hard disk companies are under pressure as customers such as tablet PC makers can 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, the companies are likely to pursue acquisitions to further consolidate the market, lower costs and alleviate competition.

Seagate has a relatively strong cash generation ability that enables the company to look for strategic acquisitions that easily integrate with its current operations. In the last-reported quarter, Seagate generated $856.0 million from operating activities, up from $682.0 million in the previous quarter. The company generated free cash flow of $713.0 million.

Furthermore, for fiscal 2015, Seagate forecasts revenues to be in the range of $500.0–$600.0 million, taking into account the acquisition of Xyratex. However, it expects earnings to remain unaffected by the acquisition.

We believe the secular growth of digital data, modest growth in the total addressable market and higher demand for storage are expected to drive near-term results. Additionally, synergies from acquisitions and product innovations continue to drive growth.

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 Corp. (WDC), SanDisk Corp. (SNDK) and Fusion-io in the long run.

Currently, Seagate has a Zacks Rank #4 (Sell). A better-ranked stock worth considering in the sector is Ingram Micro (IM), carrying a Zacks Rank #2 (Buy).

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