Why Toshiba is buying Fujitsu's HDD business

With the acquisition of Fujitsu's hard-disk drive (HDD) business, Toshiba would position itself to become a leading contender in the enterprise-class solid-state disk (SSD) drive market, as well as initially leap to the head of the pack in the 2.5-inch HDD space, say industry observers.

Toshiba and Fujitsu said today they had signed a provisional agreement under which Toshiba will acquire 80 percent of Fujitsu's hard-disk drive business. The deal is expected to close during April.

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Fujitsu said it would hold onto 20 percent of its hard drive business for a not yet determined period of time to smooth the transition of the business to Toshiba, which will make it a subsidiary.

Fujitsu is a leader in enterprise-class 2.5-inch HDD market, as well as in mobile devices.

The fast growing 2.5-inch drive marketplace includes Hitachi, Seagate, Western Digital, Fujitsu, Toshiba, and Samsung. Fujitsu ranks third in number of units shipped, ahead of Seagate, says Tom Coughlin, an analyst with Coughlin Associates.

Last year, Fujitsu shipped 38.6 million 2.5-inch HDDs. Only Hitachi, with 50.4 million, and Western Digital, with 50.3 million, lead it. Toshiba followed Fujitsu with 34.5 million, and Seagate trailed with 29.8 million units shipped.

Let's make a deal

Western Digital Corp. had been in talks with Fujitsu to buy its HDD business. That deal was estimated to be worth $945 million. The value of Toshiba's Fujitsu buyout was not disclosed.

Coughlin and Gregory Wong, an analyst with the research firm Forward Insights, said the deal between Western Digital and Fujitsu fell through because there was not cultural synergy between the two companies, and because converting U.S. dollars with Japanese Yen would have made a buyout more difficult. Both analysts speculated that Japan's government may have helped broker the deal between the two native companies.

While a leader in the HDD market, Fujitsu has been losing money on its products because its cost to produce drives are too high, Coughlin said. "It has some similarities to the issues Hitachi has having. They had a high cost structure for building drives, which put them at a disadvantage to a Western Digital or Seagate."

Toshiba, on the other hand, has been profitable in the HDD marketplace for the past 30 years. This year will be its first unprofitable year, the company said.