When Seagate (STX +0.00%) announced the acquisition of hard drive testing specialist Xyratex (NASDAQ: XRTX), it was more than just a vertical stacking move. Sure, Seagate moves another piece of the hard drive supply chain in-house with all the efficiencies that entails. But given the lack of serious alternatives for Xyratex's products, Seagate effectively made customers out of its remaining rivals.
Yes, Western Digital (WDC +3.85%) just landed on Seagate's customer list. So did Toshiba, the only remaining hard drive manufacturer outside of the Big Two.
The hard drive industry is consolidating like there's no tomorrow. A series of high-profile acquisitions has whittled down a once thriving field of eager competitors to just these three:
|
Toshiba |
Western Digital |
Seagate | |
|---|---|---|---|
|
Revenue |
11% |
45% |
44% |
|
Units |
14% |
44% |
43% |
Data from IHS iSuppli
Xyratex shares naturally jumped 27% on the news of its pending buyout. Seagate has gained 7% in a couple of days thanks to the obvious value of this deal. And of course, Western Digital's shares are flying low -- trailing the S&P 500 since the Xyratex deal was announced. Nobody likes to see the competition get stronger -- and perhaps even gain sales from Western Digital itself.
But Western Digital does have alternatives to Xyratex's testing gear. Teradyne (TER +7.11%) also sells equipment in this category, but in a limited fashion. Teradyne focuses on testing 2.5-inch portable drives, and it's a small fraction of the company's $1.4 billion in annual sales. It is planning to introduce products for the 3.5-inch format that's standard in desktops and server systems next year.
So Teradyne shares are also surging 5% on the Xyratex news. Seagate basically painted a huge bullseye on Teradyne's back, making it an obvious target for a Western Digital takeover. At the very least, you should expect Western Digital to give Teradyne a bid for just the hard drive testing division, and then accelerate the move into a full-featured testing lineup.
