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Western Digital Just Became a Seagate Customer

By Anders Bylund – Dec 24, 2013 at 12:00PM

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Seagate is buying more than just testing technology in Xyratex. The entire hard drive industry just became Seagate's customers.

When Seagate (STX) 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 -1.86%) 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 0.78%) 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.

Fool contributor Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.

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.

Stocks Mentioned

Western Digital Stock Quote
Western Digital
WDC
$34.79 (-1.86%) $0.66
Teradyne Stock Quote
Teradyne
TER
$93.39 (0.78%) $0.72
Seagate Technology Stock Quote
Seagate Technology
STX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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