Why Toshiba is buying Fujitsu’s HDD business

With the acquisition of Fujitsu 's hard-disk drive (HDD) business, Toshiba would position itself to become a leading contender in the enterprise-class solid-state disk (SSD) drive market, as well as initially leap to the head of the pack in the 2.5-inch HDD space, say industry observers.

Toshiba and Fujitsu said that they had signed a provisional agreement under which Toshiba will acquire 80% of Fujitsu's hard-disk drive business . The deal is expected to close during April.

Fujitsu said it would hold onto 20% of its hard drive business for a not yet determined period of time to smooth the transition of the business to Toshiba, which will make it a subsidiary.

Fujitsu is a leader in enterprise-class 2.5-inch HDD market, as well as in mobile devices.

The fast growing 2.5-inch drive marketplace includes Hitachi, Seagate, Western Digital , Fujitsu, Toshiba and Samsung. Fujitsu ranks third in number of units shipped, ahead of Seagate, says Tom Coughlin, an analyst with Coughlin Associates.

Last year, Fujitsu shipped 38.6 million 2.5-in HDDs. Only Hitachi, with 50.4 million, and Western Digital, with 50.3 million, lead it. Toshiba followed Fujitsu with 34.5 million, and Seagate trailed with 29.8 million units shipped.

Let's make a deal

Western Digital Corp. had been in talks with Fujitsu to buy its HDD business. That deal was estimated to be worth $945 million. The value of Toshiba's Fujitsu buyout was not disclosed.

Coughlin and Gregory Wong , an analyst with the research firm Forward Insights, said the deal between Western Digital and Fujitsu fell through because there was not cultural synergy between the two companies, and because converting U.S. dollars with Japanese Yen would have made a buyout more difficult. Both analysts speculated that Japan's government may have helped broker the deal between the two native companies.

While a leader in the hard disk drive market, Fujitsu has been loosing money on its products because its cost to produce drives are too high, Coughlin said. “It has some similarities to the issues Hitachi has having. They had a high cost structure for building drives, which put them at a disadvantage to a Western Digital or Seagate.”

Toshiba, on the other hand, has been profitable in the HDD marketplace for the past 30 years. This year will be its first unprofitable year, the company said.

With the acquisition of Fujitsu's 2.5-in HDD business, Toshiba, which sells its hard drives mainly into the consumer laptop marketplace, will effectively be catapulted into first place in unit shipments, Coughlin said. And, with Fujitsu's 20% to 25% share of the enterprise 2.5-inch HDD space, Toshiba gets an instant business customer base.

Scott Maccabe, general manager of the Americas for Toshiba's storage business, said, “We have been investigating entering the enterprise space for some time. We did our due diligence of what it would take to expand our market share. The logic made it more reasonable for us to acquire that rather than develop it in-house.” “It really lines up from a strategic as well as tactical perspective for us,” Maccabe said.

A solid win on SSD

One market that has escaped Toshiba is in enterprise-class SSD drives, the fastest growing segment of the flash drive marketplace. Toshiba invented NAND flash memory, but for all of its innovation in the space, the company has only two SSD products based on NAND — one for laptops, the other an enterprise-class drive.

Stec Inc. and Intel Corp. are the current leaders in the enterprise-class SSD space.

Maccabe said the Fujitsu acquisition would open an instant door into the enterprise-class SSD market because of the depth of Fujitsu's existing enterprise-class business customers. Wong agreed.

“I think for Toshiba, they need to make sure their solid-state disk unit and hard-disk drive unit work together. Currently, Toshiba's SSDs are basically being manufactured and sold by their NAND flash business unit. So, internally, I wouldn't be surprised if there isn't some friction there,” Wong said. “Samsung has the same problem.”

Maccabe, however, said Toshiba's HDD unit will focus on enterprise SSD sales because they have more experience in that sales space. Toshiba aims to build on the consolidation between the two companies to raise its share in the overall HDD market to over 20% by 2015, it said.

Even with the many synergies between the two companies, Maccabe said he didn't expect layoffs to result from the buyout. Fujitsu and Toshiba both sell into the mobile market place, but Maccabe said overlap was minimal.

Toshiba has a 1.8-inch hard drive line and Fujitsu does not. Fujitsu has an enterprise-class HDD product line; Toshiba doesn't. And, while both companies have 2.5-inch HDD lines, Maccabe said Fujitsu would “leverage any overlap into efficiency and scale and then have a broader set of products,” Maccabe said. “We're committed to bringing everybody over,” he said.