When Avago (NASDAQ:AVGO) purchased LSI a while back, it got with it a robust storage semiconductor business, as well as a networking chip business that seemed poised to grow. As part of that storage semiconductor business, Avago got its hands on a company that LSI had acquired just a few years ago called SandForce. SandForce was an up-and-coming vendor of solid-state drive-storage controllers, and helped the company stay competitive with Marvell (NASDAQ:MRVL), as well as the in-house controller efforts at the various flash vendors.
However, news broke today that Seagate (NASDAQ:STX), one of the two major players left in the hard disk drive business, would be buying SandForce from Avago for a cool $450 million in cash. Seagate, like rival Western Digital (NASDAQ:WDC), has been on a bit of a shopping spree with respect to any and all flash-related technologies. While hard disk drives will continue to be a veritable cash cow, neither Seagate nor Western Digital wants to be left out of the continued growth of flash.
This is a good acquisition
LSI picked up SandForce for $370 million back in 2011. Back then, SandForce's controllers were continuing to gain traction, but were still relatively immature relative to some of the offerings from competitor Marvell, as well as some of the in-house solutions from the likes of Samsung (NASDAQOTH: SSNLF). Under LSI, SandForce likely had more financial room to breathe and, as a result, could be more competitive in the longer run.
With this acquisition, Seagate gets a strong flash controller vendor, which will allow it to be a major player in both consumer and enterprise solid-state drive solutions. While Seagate is at a cost-structure disadvantage relative to a company that builds its own NAND (think Micron (NASDAQ: MU), Samsung, and Toshiba) because flash is easily the biggest part of the bill of materials, this is really only a hindrance in commodity-drive markets. In higher-end consumer and, more importantly, enterprise, the software and the controller are the key points of differentiation.
Welcome to the club, Seagate
With Toshiba having picked up the remains of OCZ, which had a pretty credible in-house controller effort, and with Western Digital having picked up STEC, it's only natural that Seagate joins the party by picking up some world-class solid-state controller IP. Indeed, with the substantial cash flows that both hard disk drive vendors generate from this duopoly, it would be foolhardy for either to not be aggressive in picking up relevant flash assets.
Impact on Marvell?
One more angle is worth exploring, and may be expanded upon in a future article -- the impact on Marvell. Marvell is a leading vendor of hard disk drive controllers and has reported excellent growth from its solid-state drive controller business. The company estimates that it has roughly 50% of the controller market for such drives, and has indicated that the near-term demand outlook for this business is good.
The longer-term question, however, is whether the merchant solutions that Marvell provides will ultimately be displaced by in-house solutions, or if the merchant model will ultimately prevail. The smaller, commodity SSD players (Corsair, Kingston, PNY, etc.) are unlikely to bring controllers in-house -- even Intel (NASDAQ: INTC) uses merchant controllers for its consumer products -- so that market is probably nice and wide open to Marvell. The drives that come from Seagate, Samsung, and others, on the other hand, will probably use in-house silicon. Time will tell how the market share dynamic between all of these players plays out.
Foolish bottom line
Seagate is using its enormous cash flow from hard disk drives to buy technology and assets that it needs to thrive longer term. Hard disk drives aren't going away -- in fact, they'll probably continue to generate robust levels of cash for years to come; but in order to drive growth, both Seagate and Western Digital need flash strategies. It seems with their recent acquisition sprees, both Seagate and Western Digital are well positioned going forward.
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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.