Western Digital Bouncing Back

Western Digital (NYSE: WDC  ) had a terrible time last year as the company saw its manufacturing facilities -- along with its dominant market share -- washed away by floods in Thailand. Its largest rival, Seagate (Nasdaq: STX  ) , on the other hand, saw its own manufacturing facilities escape relatively unscathed.

But Western Digital is chalking a comeback with the proposed acquisition of Hitachi's (NYSE: HIT  ) hard-drive business; however, the deal is waiting on regulatory approval and is on hold for anti-monopoly reasons. This is where the deal with Toshiba comes in.

Deal time
According to the agreement, Toshiba would acquire WD's 3.5-inch hard-disk intellectual property and manufacturing equipment, including a Hitachi GST manufacturing facility in China. This would hand Toshiba the opportunity to produce 3.5-inch hard-disk drives for desktop computers, servers, and consumer electronics apart from its specialization in 2.5-inch laptop hard drives.

In return, Western Digital would take over Toshiba's stricken hard drive manufacturing facility in Thailand.

The devil is in the details
Now, I know what readers might be thinking, and no, Western Digital did not give so much of its stuff to Toshiba out of sheer goodwill. This deal is just a part of a larger agenda to gain market share significant enough to allow it to compete with Seagate.

Regulators were of the opinion that the combination of WD and Hitachi would lead to a duopoly in the memory market, and required that WD dilute its memory business sufficiently with a third player to create a balanced playing field. Hence the Toshiba deal. Western Digital stands to gain in a big way if these deals go through. How much? Let's see.

As of the fourth quarter of 2011, according to research firm IHS iSuppli, Hitachi Global Storage Technologies (HGST) held a market share of 14%, while that of Western Digital's was 23%. So, if Western Digital manages to acquire HGST, it could gain a significant share of the hard-drive market.

But it's not all in black and white: Western Digital would have to revive the flood ravaged 2.5-inch hard-drive facility it's supposed to acquire. And since the company is divesting a part of its 3.5-inch hard-drive manufacturing facilities in exchange, a near-term hit in market share would be expected. But in the long run, HGST would certainly give Western Digital a significant edge in the hard-drive space.

But what about Toshiba?
Well, I hate to burst Toshiba's bubble, but at the end of the day, the hard-drive business isn't all about diversifying into different products. Toshiba might be able to make 3.5-inch drives, but it also has to generate profits in an industry where margins are thin and competition is cutthroat.

The disclaimer�
If Western Digital fails to get final regulatory approval by March 7, the company would have to pay a termination fee of $250 million to HGST. So I'd suggest a wait-and-see approach until we have some clarity about the regulatory proceedings.

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