Disk drive consolidation as Western buys Komag

Falling prices prompt proposal to buy Komag for about $1 billion; options trading ahead of deal called "suspicious."
Written by Reuters , Contributor
Western Digital has agreed to buy component maker Komag, in the latest move to consolidate the disk drive industry, for about $1 billion in cash, the companies said on Thursday.

The proposed merger comes amid a sharp fall in prices in the highly commoditized computer disk-drive industry, once one of the bedrock manufacturing sectors in Silicon Valley.

Western Digital would pay $32.25 a share for all of the outstanding shares of Komag, a supplier of the thin-film media that finished-products maker Western uses to make disk drives.

Komag stock rose 7.6 percent in after-hours trade on Thursday to $31.83, while Western Digital dipped 2 percent in extended trade to $19.15.

Separately, Komag warned that revenue for the second quarter will be down at least 30 percent from the first quarter, well below Wall Street's consensus view of $217.3 million, or an 18 percent quarterly decline.

Due the sharp revenue decline, Komag expects a substantial operating loss in the quarter.

Analysts have predicted a profit, on average, of 42 cents a share in the current quarter, according to Reuters Estimates.

In April, rival Seagate Technology scaled back its outlook for the current quarter and year, blaming a price war over high-capacity desktop computer drives, which now store as much as about 1 trillion bytes of data.

The Komag deal comes four years after Western Digital acquired part of bankrupt disk-drive parts maker Read-Rite, which supplied the mechanical heads used to read data on drives.

So-called Winchester disk drives--the basic technology used for storage in personal computers, laptops and a range of consumer electronics--were invented in Silicon Valley by International Business Machines researchers in the 1970s.

IBM sold most of its own disk drive business to Hitachi in 2003. Seagate acquired Maxtor, another of the remaining independent disk drive makers, last year.

Western Digital plans to fund the transaction, including the expected retirement of Komag's convertible debt due in 2014, through cash from the combined company and a senior secured term loan of up to $1.25 billion.

The transaction has been unanimously approved by both boards and is subject to regulatory approvals. It is expected to close in the third quarter.

Unusual trading in options positions ahead of the deal that would benefit from a rise in Komag shares looked "suspicious," an options analyst said on Thursday.

"I would say this unusual spike in call trading before the deal is suspicious," said Joe Sunderman, vice president of research and development at Schaeffer's Investment Research in Cincinnati, Ohio.

In several instances this week, the volume in Komag calls, granting investors the right to buy its stock at a given price and time, was 14 times the ordinary volume so far this year, Schaeffer's data showed.

Particularly notable were the July calls allowing investors to buy Komag shares at $30 apiece within a few weeks, Sunderman said.

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