Western Digital to Buy Drive-Device Maker

Western Digital Corp., in agreeing to buy Komag Inc. for about $1 billion, underscored pressures on makers of disk drives to control key components for making the data-storage devices.

Komag, of San Jose, Calif., makes rotating disks that serve as data-recording media inside of drives. Western Digital, a major Komag customer based in Lake Forest, Calif., said that buying the component supplier would help the company keep pace with technology and pricing changes in the fiercely competitive industry.

"This acquisition puts us in position to be in greater control of our own destiny," said John Coyne, Western Digital's president and chief executive officer.

It could also help make Western Digital more competitive with Seagate Technology, which ranks No. 1 in drive revenue and has long manufactured most of its own disks internally. Western Digital, which says it is No. 2 in the drive market, in 2003 bought Read-Rite Corp. to create an internal source of recording heads -- another component Seagate has long built in-house.

But the deal, announced Thursday, also creates challenges for Western Digital. Komag, in a simultaneous announcement, projected a 30% drop in second-quarter revenue and a "substantial operating loss for the period."

Besides Western Digital, Komag also sells disks to Seagate as well as Hitachi Ltd. Though it plans to keep offering disks to those competitors, they may seek other suppliers, causing a quarterly revenue decline of $25 million to $30 million for three quarters or so, acknowledged Tim Leyden, Western Digital's vice president of finance.

Western Digital agreed to pay Komag holders $32.25 a share in cash. That represents a 9% percent premium over the price of Komag's shares at 4 p.m. yesterday, when the stock traded at $29.58, up 49 cents. But the stock had risen over the past several days amid rumors of a deal, analysts said.

Shaw Wu, an analyst at American Technology Research, called the price tag "quite expensive." But he and Richard Kugele, who tracks the industry for Needham & Co. agreed that the deal could help Western Digital.

"I think this type of merger was inevitable and was probably just accelerated by the softening conditions at Komag," Mr. Kugele said.
Source : http://online.wsj.com