Monday, December 26, 2005

SeaGator - A puzzled vision

I hope everyone had a great Christmas and Holiday weekend. I am still puzzled about getting Tide to Go as Christmas gift yesterday… may be I am not seeing the spots others see! Anyway I didn't get my wish, a Tablet PC. Oh! Well, I can't expect everything as gift. But I did get some that money can't buy. Thanks Santa!

For last few days, I have been puzzled by the Seagate acquisition of Maxtor. Well, nothing new, I have been puzzled about lot of things last week. In the media, it has been positioned as cost saving measure and price protection through consolidation.

When a merger between two competitors takes place and the only real benefit put forward is cost saving, To me, this is an admission of declining growth in their market segment or consolidating their positions to prepare against some external threat.

Personally, I like M&A reasons being future revenue growth instead of cost savings. I rather see 1 +1 = 2.2 instead of 1 + 1 = 1.8. And, more and more, SeaGator looks like 1.6.

A Cursory financial look (mind you, I am no accountant or financial analyst) suggests that SeaGator will have to bring in revenues 3 - 10% in excess of combined revenues of Seagate and Maxtor just to pay-off the acquisition in three years time frame. And the proclaimed cost savings are peanuts in the larger financial picture of SeaGator.

I don't expect any of the major customers of disk drives to roll-over and play dead in price negotiations either. And from risk management perspective, these customers are not going to give same business to SeaGator as they did to Seagate and Maxtor separately. In short term, SeaGator loss will be gain for Western Digital, Hitachi and other niche players.

Seagate and Maxtor were primarily playing in 2.5" and 3.5" disk drive market and array/server/desktop storage market. Seagate for Apple iPod and Maxtor for DVRs being their foray in to consumer electronics and mobile devices where both are losing these markets to newcomers and niche players with micro-drives and flash memory.

Storage for mobile devices and consumer electronics is a faster growing market but it seems Seagate and Maxtor couldn't take that quantum leap! So they are taking consolidation route to strengthen their position in existing segment.

But the same benefits that make sense to consolidate for SeaGator will turn SeaGator customers to look in to other options to regain their lost leverage.

In the long-term, this supplier consolidation will result in structural changes to the data storage array segment as it will force this segment to look beyond, re-evaluate their next generation designs and give serious considerations to products from emerging suppliers. In my opinion, major beneficiary of this consolidation will be the niche and emerging players not SeaGator.

I guess Seagate couldn't wait long enough for Santa to give it a better Christmas gift at half the price and with better future revenue growth potential.

If you do, you are damned and if you don't, you are still damned. Isn't being incumbent grand!

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