Will Seagate's acquisition of Maxtor spell trouble for its rivals?

The disk drive industry holds its breath for an acquisition rivaling the Hitachi-IBM deal

Three years ago, a January Storage Insider column focused on a big and, at that time, stunning acquisition in the disk drive market segment. The deal essentially translated into IBM selling its disk drive business to Hitachi by way of creating a new company, Hitachi Global Storage Technology, which became the steward of that storage segment for the Japanese giant.

Given that history, I am excited to open 2006 with another gigantic deal in the disk drive industry, as Seagate has committed to purchase rival Maxtor -- lock, stock, and barrel. 

Make no mistake: The recently announced intention to buy Maxtor is Seagate's answer to that Hitachi-IBM deal, and it spells out the company goals more clearly and forcefully than any executive speech.

Obviously, Seagate has a plan to maintain and possibly expand its leadership in the disk drive segment. The additional purchasing potential it will gain from current Maxtor customers brings a larger revenue flow to support that vision.

In the short term, Seagate will certainly benefit from Maxtor's excellent product lineup in SATA and SAS (serial attached SCSI) drives. As we all know, 2006 is the year we expect the SAS revolution to finally begin; in the next few years, SAS should gradually replace parallel SCSI in the enterprise, and perhaps nibble on FC drives, too.

It won't happen overnight, and I have seen contrasting estimates of how fast and how far the SATA/SAS drives will spread. But even the most prudent figures have vendors drooling in anticipation. Seagate was entitled to a good share of that giant pie on its own, but the additional dollars brought in by acquiring Maxtor will make a big difference.

However, it would be wrong to think that greed is Seagate's only motivation in this acquisition. The disk drive business has a rather strange identity, squeezed as it is between thin margins and a rather voracious appetite for R&D dollars, which is crucial to the very existence of a company in that market.

"Perpendicular recording" and "object storage" are just two areas (that I know of) in which Seagate is actively spending those research dollars; the additional revenues from Maxtor may allow the company to spend at least as much research money as its nearest competitor. Moreover, a steady revenue stream from enterprise products will give Seagate more strength to battle in other emerging and promising storage market segments, including auto, mobile, and DVR applications.

Based on this analysis, the inescapable conclusion is that Seagate really had no other choice than to expand, and that acquiring Maxtor -- probably its most closely matched contender -- was a matter of competitive necessity. Could this "necessity" apply to other storage vendors too? It's too soon to say, yet I doubt this will be the last acquisition in the drives sector. 2006 is still young, but promises to be at least as interesting as 2005. Happy New Year!