Seagate lands Samsung's hard drive unit for $1.37 billion: It's duopoly time

Seagate has acquired Samsung Electronics' hard disk drive (HDD) operations for $1.37 billion in a move that boils the market down to two players. Seagate and Western Digital now control 90 percent of the HDD market with Toshiba a distant third. Under the terms of the deal, Samsung will lump its HDD unit into Seagate in exchange for a cash and stock deal worth $1.375 billion. Samsung will own nearly 10 percent of Seagate and the two companies will cross-license patents. Samsung will also provide NAND flash memory for Seagate's solid-state drives. In addition, Seagate will supply drives for Samsung's PCs.

The two companies will also co-develop enterprise storage gear. Seagate and Samsung have had a joint development pact since August.

In many respects, the Seagate-Samsung deal rhymes with Western Digital's acquisition of Hitachi's storage unit. You have two U.S. companies teaming up with an Asian partner to gain more scale, boost margins and focus more on the enterprise. Related: Samsung's hard-drive unit sale could lead to massive market consolidation

Barclays Capital Ben Reitzes said in a research note that the Seagate acquisition of Samsung's HDD unit made sense to counter Western Digital. With Samsung, Seagate will have market share of about 40 percent in the market. Combine that share with Western Digital and two companies control about 90 percent of the market. Robin Harris notes that there are only three HDD companies left. I'd argue No. 3 is so small that'll it'll have to merge to play the game.

Reitzes wrote:

We believe that any acquisition would be a net positive for the HDD industry and its remaining competitors (Western Digital and Toshiba). Due to increased consolidation and capacity rationalization, industry participants should benefit long-term from improved pricing. In recent months, pricing has continued to firm within the industry and future consolidation would likely help support pricing and margins.

For Seagate, the Samsung deal will be "meaningfully accretive" to earnings and cash flow in the first year after the deal closes.

Steve Luczo, Seagate CEO, said:

With these agreements, we expect to achieve greater scale and deliver a broader range of innovative storage products and solutions to our customers, while facilitating our long-term relationship with Samsung.

Other key points about the deal:

• Samsung gets a board seat;
• Seagate will issue 45.2 million shares for Samsung;
• There are no financing contingencies.

Separately, Seagate reported its fiscal third quarter earnings. The company delivered first quarter earnings of $93 million, or 21 cents a share, on revenue of $2.7 billion. Non-GAAP earnings were 25 cents a share. Wall Street was expecting earnings of 27 cents a share.