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Western Digital Bouncing Back

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Western Digital (NYSE: WDC  ) had a terrible time last year as the company saw its manufacturing facilities -- along with its dominant market share -- washed away by floods in Thailand. Its largest rival, Seagate (Nasdaq: STX  ) , on the other hand, saw its own manufacturing facilities escape relatively unscathed.

But Western Digital is chalking a comeback with the proposed acquisition of Hitachi's (NYSE: HIT  ) hard-drive business; however, the deal is waiting on regulatory approval and is on hold for anti-monopoly reasons. This is where the deal with Toshiba comes in.

Deal time
According to the agreement, Toshiba would acquire WD's 3.5-inch hard-disk intellectual property and manufacturing equipment, including a Hitachi GST manufacturing facility in China. This would hand Toshiba the opportunity to produce 3.5-inch hard-disk drives for desktop computers, servers, and consumer electronics apart from its specialization in 2.5-inch laptop hard drives.

In return, Western Digital would take over Toshiba's stricken hard drive manufacturing facility in Thailand.

The devil is in the details
Now, I know what readers might be thinking, and no, Western Digital did not give so much of its stuff to Toshiba out of sheer goodwill. This deal is just a part of a larger agenda to gain market share significant enough to allow it to compete with Seagate.

Regulators were of the opinion that the combination of WD and Hitachi would lead to a duopoly in the memory market, and required that WD dilute its memory business sufficiently with a third player to create a balanced playing field. Hence the Toshiba deal. Western Digital stands to gain in a big way if these deals go through. How much? Let's see.

As of the fourth quarter of 2011, according to research firm IHS iSuppli, Hitachi Global Storage Technologies (HGST) held a market share of 14%, while that of Western Digital's was 23%. So, if Western Digital manages to acquire HGST, it could gain a significant share of the hard-drive market.

But it's not all in black and white: Western Digital would have to revive the flood ravaged 2.5-inch hard-drive facility it's supposed to acquire. And since the company is divesting a part of its 3.5-inch hard-drive manufacturing facilities in exchange, a near-term hit in market share would be expected. But in the long run, HGST would certainly give Western Digital a significant edge in the hard-drive space.

But what about Toshiba?
Well, I hate to burst Toshiba's bubble, but at the end of the day, the hard-drive business isn't all about diversifying into different products. Toshiba might be able to make 3.5-inch drives, but it also has to generate profits in an industry where margins are thin and competition is cutthroat.

The disclaimer…
If Western Digital fails to get final regulatory approval by March 7, the company would have to pay a termination fee of $250 million to HGST. So I'd suggest a wait-and-see approach until we have some clarity about the regulatory proceedings.

You can keep a close tab on Western Digital's progress by adding it to your Watchlist. Don't worry, it's free and it lets you stay on top of the latest news and analysis of your favorite companies.

Keki Fatakia does not hold shares in any of the companies mentioned in this article.

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