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Hard-drive maker Seagate Technology (STX) has had a particularly volatile couple of years, magnified by rapidly shifting operating conditions. The company has maintained a strong hold on a few key end markets, namely the desktop and enterprise markets. However, increased competition and a surplus in supply have been hurting profits. The impact of recent setbacks within the storage sector has caused at least one buyout deal (and probably more) between Seagate and outside investors to fall through. Moving forward, it will be interesting to see how the hard-drive maker reacts to a more difficult operating environment and whether a new deal can be formed.

Seagate has had a dynamic presence within the electronic storage industry since its inception.  The company was founded in the late 1970s as one of the first mass manufacturers of hard drives. Early on, Seagate grew to be one of the more successful companies, due to its strong relationship with International Business Machines (IBM - Free IBM Stock Report), the major producer of PCs at the time. The company maintained market leadership in the sector through much of the 1990s, driven by new technology and acquisitions. It eventually was taken private in 2000 by an investment group partially consisting of existing management. Seagate then reentered the public market in 2002 and has been there ever since. It enhanced its market share in 2006 with the purchase of competitor Maxtor, the third largest producer of hard drives at the time. Recently, private equity groups and competitors have been attempting to buy out the company again. However, these efforts have come up short.

Seagate continues to be successful in the industry thanks to its high-capacity hard drives, which are used in enterprise, desktop, mobile and consumer electronic applications. The company’s specialty has been the enterprise market, which consists of servers, networks, and work stations used primarily at large companies. Its marketed drives have reached capacities exceeding three terabytes (TB). Seagate’s shipments for enterprise devices approached seven million units per quarter recently, or more than 50% of the available market. Seagate also has a smaller, but significant, share of the desktop and mobile storage sectors. The company shipped more than 33 million units targeting these applications, or about 27% of the market, in the recent September period.

Despite increased consolidation, the electronic storage industry has become highly competitive of late. An oversupply of inventory has forced many producers to cut prices on hard drives. Also, some of Seagate’s competition has closed the gap on its technological advancement. The most noticeable threat has been competitor Western Digital (WDC), which has picked up a significant share of the hard drive market over the past few years by specializing in mobile and consumer electronics. In fact, Western Digital has overtaken Seagate in units sold over the past few quarters. Seagate still has the upper hand in higher-end enterprise and PC hard drives, enabling it to keep the number one status in revenues for now. However, the increasing presence of Western Digital is likely to continue to threaten Seagate’s overall power in all areas of the electronic storage sector.

Probably the biggest threat to Seagate, as well as the rest of the hard drive industry, is the technological progress being made on the solid-state front. Solid-state technology uses microchips rather than a hard disk to store memory. It is lighter and more compatible for use in smaller devices, such as cell phones and mp3 players. There are also no moving parts, adding to speed and limiting failure rates. As a result, many new electronic designs are incorporating solid-state drives rather than their hard-drive counterparts, particularly those in consumer electronics devices. Most notably, Apple (AAPL) has moved to solid-state drives for many of its applications. The drawback to solid-state technology is that its capacity levels are still generally lower than comparable hard drives. Also, the cost of making solid-state drives is significantly higher. As a result, the hard drive industry is hoping that these barriers will limit the use of solid-state technology in electronic designs over the next few years, particularly in larger and higher-margined applications in the enterprise and corporate computing markets.

Still, it would be inaccurate to say that Seagate and Western Digital are not concerned. In fact, both have initiated entry into the solid-state market, with hopes of joining the bandwagon should the storage industry shift further in that direction. The market for solid-state drives is much more fragmented than the hard drive industry, which has both positive and negative implications for those trying to enter that field. Some of the major producers of solid-state drives (also known as flash drives) are Intel (INTC - Free Intel Stock Report), SanDisk (SNDK) and Samsung. It will likely be a few years before Seagate could compete on the level of these manufacturers.

The major reason that a buyout did not occur is because Seagate’s stock price was higher than outside investors (including Western Digital at one point) were willing to pay for the company. At the current price, at more than $14 a share, it is unlikely that a deal will go through, given the lukewarm prospects of the hard-drive market and the projected interest in a public offering down the road, when private equity investors would look to profit from the investment.

At the time of the article’s writing, the author did not have any positions in the companies mentioned.