On Thursday, July 19, OCZ Technology Group (OCZ) rose 23% during the day’s trading session as a rumor of a possible buyout by Seagate Technology (STX) circulated amongst investors. The rumor was initiated by Fuad Abazovic, the Editor-in-Chief of website Fudzilla.com and can be found here. According to Fuad, Fudzilla’s industry sources claim that Seagate is possibly considering an acquisition of OCZ in order to gain a greater foothold into solid state drives [SSD]. Yet they are not alone in the potential acquisition process. Micron Technology (MU) and “a few other companies” were also in talks with OCZ for a potential acquisition.
For all the skepticism that comes with a high-flying industry rumor, the story makes a lot of sense from an objective standpoint. As a leading hard disk drive [HDD] specialist, Seagate is eventually going to need a stronger presence in the SSD market in order to stay competitive. As a faster storage technology that is rapidly coming down in cost, SSDs are clearly going to have a dominant role in the future to come. Additionally, as a late adopter to the technology, it would make sense for Seagate to penetrate the market through acquisitions rather than conducting the expensive RD process from scratch always two steps behind the competition.
On the other hand, the argument for Micron pulling up as the winning bidder for OCZ stands less convincing. For a company now trading at $5.88 billion, Micron already appears to have its hands full with the $2.5 billion takeover for the bankrupt Japanese manufacturer Elpida Memory (ELPDF.pk). Though only paying for a fraction of the cash upfront, the likely acquisition that was only announced in early July would still be a big adjustment for the company. After adding the cost of its simultaneous acquisition of Powerchip Technology Corporation, Micron’s cash balance is sure to be cut by over half. Indeed, “ambitious” would be the word to suggest Micron is going for a third maneuver, especially in the midst of heavyweight competition from a name such as Seagate.
As for OCZ Technology, the legitimate reason for accepting an acquisition would be for a healthy access to more abundant resources. According to Fuad, OCZ had previously found itself unable to address market demand on some occasion. Significant cash reserves and expansion capabilities following the acquisition would be the most ideal circumstance for OCZ. This too sheds doubt on a Micron takeover. As for Seagate, the company is flush with abundant cash flows from a waning industry found in HDDs. In the last quarter alone, Seagate brought in a total of $938 million in cash from operating activities. The company then proceeded to significantly increase its dividend and share buybacks.
Seagate now stands with its back to the wall in the HDD market. There remains little room for additional acquisitions in the industry thanks to the essential duopoly between Seagate and Western Digital Corporation (WDC). Through recent acquisitions, the two companies have managed to split the HDD market along with a much smaller presence held by Toshiba. With growing amounts of cash on hand, a languishing primary market, and an inexpensive entry point into promising growth company, Seagate stands the most the benefit from an acquisition of OCZ Technology.