Seagate TeamDiskStratFinal
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Company Name Seagate Technologies (NYSE: STX) Strategic Move Acquisition of Maxtor Corporation (NYSE: MXO) Document Type Capstone Project Report Document Stage Final Submitted By Jay Bennett Mangesh Bhandarkar Kathleen Dang Ajay Khanna Kaartik Viswanath
Transcript of Seagate TeamDiskStratFinal
Company Name Seagate Technologies (NYSE: STX)
Strategic Move Acquisition of Maxtor Corporation (NYSE: MXO)
Document Type Capstone Project Report
Document Stage Final
Submitted By
Jay Bennett
Mangesh Bhandarkar
Kathleen Dang
Ajay Khanna
Kaartik Viswanath
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Figure 1: Team DiskStrat at Seagate's Facility in Milpitas, CA
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Table of Contents
1 Executive Summary................................................................................................................ 5 1.1 Wall Street Journal Article.............................................................................................. 5 1.2 Executive Summary........................................................................................................ 7
2 External Analysis .................................................................................................................... 8 2.1 Industry Definition.......................................................................................................... 8 2.2 Five Forces Analysis....................................................................................................... 8 2.3 Macro Environmental Forces Analysis........................................................................... 9
2.3.1 Global...................................................................................................................... 9 2.3.2 Social..................................................................................................................... 10 2.3.3 Technological........................................................................................................ 10 2.3.4 Governmental/Political ......................................................................................... 12 2.3.5 Ethical ................................................................................................................... 12 2.3.6 Economic (macroeconomic trends) ...................................................................... 12 2.3.7 Demographic Trends............................................................................................. 12
2.4 Competitor Analysis ..................................................................................................... 13 2.4.1 Key Competitors ................................................................................................... 13 2.4.2 Competitor Strategies............................................................................................ 14 2.4.3 Competitive Position............................................................................................. 16 2.4.4 Willingness to Pay ................................................................................................ 17 2.4.5 Comparative Financial Analysis ........................................................................... 23 2.4.6 Implications of Competitive Analysis .................................................................. 24
2.5 Intra Industry Analysis.................................................................................................. 26 2.5.1 Strategic groups .................................................................................................... 26 2.5.2 Threats and Opportunities..................................................................................... 26 2.5.3 Channels................................................................................................................ 28
2.6 Failure Analysis ............................................................................................................ 28 2.7 Threats and Opportunity Analysis ................................................................................ 29 2.8 Summary of External Analysis ..................................................................................... 29
3 Internal Analysis ................................................................................................................... 31 3.1 Business Definition/Mission......................................................................................... 31 3.2 Management Style ........................................................................................................ 31 3.3 Organizational Structure, Controls and Values ............................................................ 31 3.4 Strategic Position Definition......................................................................................... 33
3.4.1 Corporate Level Strategy ...................................................................................... 33 3.4.2 Business Level Strategy........................................................................................ 36 3.4.3 Resources and Capabilities ................................................................................... 38
3.5 Financial Analysis......................................................................................................... 42 3.5.1 Maxtor Valuation .................................................................................................. 43 3.5.2 Valuation of Merged Seagate and Maxtor firms................................................... 44 3.5.3 Scenario Analysis of the Merged Firm Performance............................................ 45 3.5.4 Seagate without the Acquisition ........................................................................... 46
4 Analysis of Effectiveness of Strategy................................................................................... 47 4.1 Strategy Analysis and Summary................................................................................... 47
4.1.1 Seagate Strategy Summary ................................................................................... 47
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4.1.2 Seagate Acquisition Benefit Summary ................................................................. 47 4.2 Maxtor Acquisition Challenges .................................................................................... 50 4.3 Acquisition Risks .......................................................................................................... 51
4.3.1 Failed Acquisition Scenario.................................................................................. 52 4.4 Acquisition Highlights .................................................................................................. 53 4.5 Other Effects of the Acquisition ................................................................................... 53 4.6 Final Evaluation ............................................................................................................ 54
5 Recommendations................................................................................................................. 55 5.1 Strategy Implementation............................................................................................... 59
6 Conclusion ............................................................................................................................ 61 7 Bibliography ......................................................................................................................... 62 8 Appendices............................................................................................................................ 66 9 Interview Questionnaire........................................................................................................ 96 10 Survey Questions & Results ............................................................................................. 98 11 Willingness To Pay Background Financial Data ............................................................ 106
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1 EXECUTIVE SUMMARY
1.1 Wall Street Journal Article
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1.2 Executive Summary
Seagate Technology is the largest producer of hard disk drives in the world with storage products
serving the diverse needs of Enterprise, Desktop, and Mobile applications. The hard disk drive
market has started to shift away from Seagate’s strength – the Enterprise and Desktop (PC)
segments – towards smaller form factor storage products for handhelds.
Seagate announced its $1.9 Billion dollar acquisition of rival Maxtor on December 21, 2005.
Through the acquisition, Seagate consolidates its market dominance in the Enterprise and
Desktop segments and positions itself to gain market share in the rapidly expanding Mobile
market segment. The acquisition eliminates a competitor and brings much needed retail channel
expertise and manufacturing capacity to Seagate. Maxtor’s wholly owned subsidiary, MMC
Technology, augments the supply of media and other critical manufacturing components
required to make hard disk drives. Maxtor engineers, who are retained in the merged firm, also
bring necessary engineering talent to Seagate to increase its presence in the Mobile market.
Seagate faces several short-term challenges as it absorbs the free wheeling Maxtor into its
centralized and hierarchical organization. First, key Maxtor employees, especially those in the
retail channel team, must be retained to leverage their channel expertise. Second, mishandled
customer relationships will prevent Seagate from consolidating Maxtor’s market share, so
Seagate must honor Maxtor warranties and contract obligations. Seagate must turn Maxtor
customers into Seagate long-term strategic customers. And finally, Seagate must consolidate its
product portfolio and Maxtor’s entirely outsourced supply chain to produce Seagate products.
Long term, Seagate must focus on building brand awareness around its strength as the world’s
premier storage provider and continue to find inroads into ubiquitous computing applications like
iPods, PDAs, and Cell Phones through strategic relationships and investments in R&D. Seagate
must leverage its abilities in delivering hard disk drives to expand into adjacent markets;
consider partnerships to provide Flash-based storage and also consider forward integrating into
network-based storage solutions businesses.
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2 EXTERNAL ANALYSIS
2.1 Industry Definition
Seagate competes in the Hard Disk Drive Manufacturing or the Computer Storage Devices
Manufacturing Industry (NAICS Code: 334112, SIC Code: 3572). The hard disk drive industry
consists of independent and captive manufacturers producing disk drives used to store data in
systems and devices ranging from consumer electronics to high-end servers.1 Figure 2 shows a
diagram of the industry.
SuppliersKomag
AlpsTDK
Thin-film
Hard Disk Drive
Manufacturer
Desktop
Enterprise
OEM
Distributors
Retailers
Systems Integrators
Distributors
OEM
Distributors
Retailers
DVR, game console ,
and digital camerasmanufacturers
End users
(ie, digital cameras , TiVo and
game console users)
Enterprise customers
End users(ie, cell phone
and PDA users)
Mainframe
Server
Mobile
Consumer
Cellular phone and
PDA manufacturers Consumer
Figure 2: Hard Disk Drive Industry Diagram
2.2 Five Forces Analysis
Exhibit 1 shows the complete Level 1 and Level 2 industry analysis. Table 1 shows the
summary of the 5 Forces Analysis for the hard disk drive industry. The explosive growth in the
mobile market and the consumer electronics segments makes this industry Moderately
Attractive with a score of 2.
1 Independent manufacturers primarily produce hard disk drives as standalone products. Captive manufacturers and/or their affiliated entities produce complete systems containing disk drives or other storage products.
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Force Score/Rank
Weight Notes
Buyer Power 2 20% The market for hard disk drives is fragmented. Buyer power in this market is low but it is an important consideration for the analysis because customers demand values such as performance, quality, and form factor.
Supplier Power 1 5% Most firms in this industry are backward integrated, giving the suppliers very little power in this industry.
Barriers to Entry
2 20% There are learning and economies of scale in this industry. With consolidation, price pressures and lack of product differentiation, the threat to entry is not a major threat. However, this industry has historically been susceptible to disruptive technologies, making this an important factor in the analysis.
Rivalry Among Existing Firms
4 25% Rivalry in the industry is very high with ongoing consolidation between the incumbents. The established players have high strategic stakes in this industry, making this industry very competitive and rivalry an important factor for the analysis.
Complementors 3 5% There are no strong complementors for the hard disk drive industry. Complementors such as digital cameras and software impact storage requirements such as form factor but provide a majority of the value to customers. This reduces the weight of this factor in the analysis.
Substitutes 2 25% For low-end applications, Flash-based storage is a strong substitute. Similarly for data archiving needs, optical and tape-based storages are strong substitutes. Substitutes are an extremely important factor in the analysis of this industry and hence are weighted heavily.
Overall 2.5
Table 1: Level 3 Analysis for Hard Disk Drive Industry
2.3 Macro Environmental Forces Analysis
2.3.1 Global
US-based firms dominate the hard disk drive industry. These firms have 85% market share, pay
42% of all wages, and employ 66% of the work force. Most of the production and assembly is
done outside the US. As of 2005, less than 1% of the hard disk drive final assembly was done in
the US, down from approximately 5% in 1995 (Gourevitch, et. al., 1997). Labor costs have been
the primary drivers for moving low skilled activities to countries with low-cost labor and
retaining high skill activities such as R&D in high wage locations.
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Singapore is the world leader in the hard disk drive assembly (Wong, 1999), but over the past
few years’ production has been moving to the other Asian countries like China, Malaysia, and
the Philippines (Tecson, 1999). Asian countries have the largest global impact on the disk drive
industry primarily because they have such a large potential market and because of their emerging
status as a source of skilled labor and competitive technology (Linden, 2004).
2.3.2 Social
Increasing usage of storage devices is causing increasing concerns about data security and proper
disposal of hard disk drives after useful life. Government agencies require that no “Shadow
Data” remain on the disk after erasing the data on hard disk drive. Proper disposal of disk drives
has become a growing concern because procedures such as overwriting data on disks at least
seven times cannot ensure that the data is 100% erased. Hard disk drives are being destroyed by
physical destruction and incineration (Bryson, et.al.) on the one hand fueling demand for disk
drives but at the same time increasing the pressure on disk drive manufacturers to develop
technology to better delete stored data.
In Europe, environmental regulations such as RoHS (Restriction of Hazardous Substances)
regulations (DTI, 2005) and WEEE (Waste Electrical and Electronic Equipment) (DTI, 2004)
regulations govern the manufacturing and disposal of electronic equipment including hard disk
drives. Manufacturers failing to meet the stringent requirements mandated by the regulations are
prevented from selling products in the European Union (EU) and can face stiff penalties for
violating these regulations. Other countries including China, Japan and several states in the US
are also adopting similar legislations. This is a big concern risk for hard disk manufacturers as
they stand to lose a significant portion of their revenue if they don’t measure up to the standards.
2.3.3 Technological
The hard disk drive industry is in the mature phase of its life cycle with large category size, low
growth, high competition and minimal profits. Since the first magnetic drive was introduced in
1956, the industry has gone through significant increases in areal density2, performance, and
2 Areal density refers to the amount of data that can be stored on a given amount of hard disk platter space.
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capacity, coupled with a decrease in form factor.
Following are some of the most notable trends in the hard disk drive industry:
o Areal/Volumetric Density: Determines the capacity, internal data rate and cost to
produce the drive. Density has doubled every year since the drive was introduced in
1956 so that today’s density is 35-million times greater then when the disk drive was first
introduced.
o Form Factor: Defines the dimensions of the hard disk drive. Remarkable developments
have occurred in form factor miniaturization and these developments are expected to
continue. In the future, smaller form factor disks will be used for large storage arrays.
Small form factor disks have reduced the cost and increased the capacity and
performance of Redundant Array of Independent Disks (RAID) system architectures.
o Power/Performance: Smaller form factor, increased revolutions per minute (RPM) and
increased areal density have allowed for higher performance and lower power
consumption. Hard disk drives are increasingly becoming more economical for
applications requiring low power consumption.
o Shock Tolerance: An important factor that would determine the “winning” storage
solution is shock tolerance. With the rapid growth of the mobile segment, hard disk
drives are being used everywhere, with many enduring extreme and constant movements.
These new conditions are not ideal for the common hard drives and need to be handled by
new and recent technology.
o Other Alternatives: Optical/DVD enhancements and holographic storage products may
replace the hard disk drive in the future, but are years away from commercial viability.
Smaller size and lower weight have made Flash-based storage devices a primary
challenger to the hard disk drive industry for the last few years; however, cost per
megabyte is still significantly higher for Flash-based storage. Analysts predict that the
Flash-based storage is likely to be the preferred storage medium for applications up to
10GB and hard disk drives the preferred choice for all applications requiring storage
beyond 20GB (Masaki, et. al. 2005). Exhibit 3 shows the comparison between hard disk
drives and Flash-based storage devices at various storage capacities.
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2.3.4 Governmental/Political
As described in Section 2.3.2, government regulations regarding concerns of “Shadow Data” do
not allow for proper recycling of hard disk drives. Manufacturers are developing more precise
mechanical read/write components to minimize these recycling issues. Disk drive manufacturer
first to market with a technological solution for this problem will gain at least a temporary
competitive advantage over its rivals.
Governmental policies place requirements on data and email storage for corporate governance.
New regulations such as Sarbanes-Oxley, 21 CFR Part II, HIPAA, and SEC 17a-4 are driving up
the demand for storage by preventing deletion of many records. These regulations require
archival of data related to manufacturing, processing, and packaging of food for three years and
drugs for five years after end-of-life. Companies spent approximately $15.5 billion in 2005 on
compliance. Future spending is expected to increase with additional regulation (Robb, 2006).
2.3.5 Ethical
With most of the hard disk drive production in South East Asia, labor standards have become a
growing concern for American companies. Data security and environmental friendliness are also
additional ethical concerns when disposing hard disk drives past their useful life.
2.3.6 Economic (macroeconomic trends)
As economies around the world continue to develop, particularly China and India (7% and 8%
GDP growth), the need for information technology is growing. Modernized banking systems
and stock markets are driving up the demand for large and reliable storage. As US economic
growth has started to pick up again, firms have also increased their IT spending on storage.
2.3.7 Demographic Trends
Pervasive computing applications using digital content have fueled a large growth in storage
requirements. The introduction of new applications such as digital video recorders and digital
music players in the mobile computing segment have expanded the market for the hard disk
drives outside of the traditional computer industry. These trends are expected to continue in the
future, significantly increasing data storage requirements.
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2.4 Competitor Analysis
2.4.1 Key Competitors
Seagate’s competitors fall into two groups: independent hard disk manufacturers, such as
Western Digital, and captive manufacturers like Hitachi Global Storage Technologies, Samsung,
Toshiba, and Fujitsu. Figure 3 shows the market share of all the competitors for Seagate.
Together, Seagate (28.4%) and Maxtor (14.0%) have a combined market share of 42.4%
(Masaki, et. al., 2006). The top six firms in this industry comprise 98.5% of total market share,
with the other 1.5% going to smaller independent manufacturers.
Figure 3: Market Share for Hard Disk Drive Manufacturers
The industry is divided into three main market segments: Mobile, Desktop (PC and non-PC), and
Enterprise. Exhibit 2 shows the product segments in each market segment. Personal Computing
and Consumer Electronics are also used to refer to the some of the product segments (refer
Exhibit 2). Western Digital, Hitachi GST, Fujitsu and Samsung are Seagate’s main competitors
in the desktop and enterprise segments. The combined Seagate and Maxtor will lead with 66.4%
of the enterprise market and 53.1% of the desktop market. Although these segments are mature
market segments, firms are constantly improving the areal density of the disks. Firms bringing
products with new technology to market first stands to gain more market share. In addition, the
demand for hard disk drives in the mobile and desktop (non-PC) market segments are expected
to grow at the fastest rate. Thus, firms that are able to gain market share will be able to benefit
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from the rapid growth and expand into these new market segments. Currently, Hitachi GST
(31.4%), Toshiba (28.3%), and Fujitsu (16.6%) have relatively strong market share in the mobile
segment compared to Seagate with only 14.1%. Maxtor is non-existent in the mobile market
segment. Captive firms such as Fujitsu and Samsung are forming partnerships with independent
hard disk manufacturer Cornice (1.1%) to strengthen their market share in this segment.
Although Cornice is very small and only participates in the mobile market, its partnerships, along
with the rapid growth of hard disks in consumer electronics, could make it a strong competitor
for Seagate in the near future (Reinsel, 2006).
2.4.2 Competitor Strategies
Business and Corporate level strategies depend on whether the firm is an independent or captive
manufacturer. Exhibit 2 shows each firm’s strategic position. Storage capacity cannot be used
as a differentiator in the hard disk drive industry since competitors can quickly adopt newer
technologies to achieve the same customer value. Exhibit 10 summarizes all the competitive
strategies. The following lists each firm’s strategies and how each attempt to achieve it:
o Seagate: Seagate, an independent hard disk manufacturer, is a single business
organization focused on a hybrid between cost leadership and broad differentiation.
Seagate is largely backward integrated with manufacturing expertise to realize operating
efficiencies and allows it to maintain low manufacturing costs. Seagate uses its
technology leadership and product customization as the differentiating factors against
competitors. It works closely with OEMs to build and maintain customer relationships,
which allows it to develop new products meeting customer needs and increasing
customers’ perception of service and support. Seagate continually adopts new
technology for manufacturing hard disk drives as well as one of the first to bring new
technologies to market (Seagate 10K, 2005).
o Maxtor: Maxtor, a single business organization focuses on broad differentiation as its
current business level strategy. Maxtor uses its excellent retail channel management,
branding, and product innovation as the differentiating factors.
o Western Digital (WD): Another independent manufacturer, Western Digital’s single
business is to manufacture hard disks using a cost leadership and broad differentiation
strategy. WD differentiates against its competitors by focusing on quality of service such
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as on-time delivery. It also uses its strategic relationships with OEMs as a differentiating
factor. Western Digital aims to increase its investments in R&D to maintain its
leadership position in desktop hard drives and to build its market position in the
enterprise segment (Western Digital 10K, 2005).
o Hitachi GST: Formed as a result of the merger between IBM and Hitachi’s storage
business, Hitachi Global Storage Technologies is a single business unit. Its business
level strategy is one of focused differentiation. Although it has a 12% market share in the
enterprise segment, Hitachi GST’s strategy is focused because this segment is only 9% of
the overall market. This newly formed organization can leverage the Hitachi brand to
further expand its market share in the mobile market, along with increased investments in
R&D to explore emerging applications of hard disk drives in consumer electronics.
o Samsung: With many diverse products and services, Samsung’s business level strategy
is a combination of cost leadership and focused differentiation in unrelated businesses.
The company takes advantage of low labor costs in manufacturing along with its
expertise component manufacturing to maintain its low costs (Kanellos, 2004). Samsung
is proud of its technological innovation and elegant style, all of which allows it to charge
a premium for its products. It continues to invest in R&D to further differentiate itself
from competitors (Samsung 10K, 2004).
o Toshiba: With products ranging from home appliances to digital products, Toshiba has
established its presence in various industries and market segments. Its business level
strategy is cost leadership and focused differentiation by differentiating itself from
competitors on cost, quality and development speed throughout its corporate strategy of
unrelated businesses. It aims to reduce costs by standardizing components and increasing
efficiency in production and distribution. For its hard disk drive business, Toshiba plans
to strengthen its joint venture with Samsung to expand product development and
manufacturing to widen its product lines (Toshiba 10K, 2005).
o Fujitsu: Fujitsu is a related linked organization with numerous products in the computer
and electronics industries with a cost leadership and focused differentiation strategy. It
aims to improve performance and quality of its products and simultaneously reduce costs
(Fujitsu 10K, 2005). According to Williams, the company is positioning its strategy such
that it can grow its hard drive business threefold by 2008 and become one of the top three
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hard disk manufacturers (Williams, 2006).
o Cornice: A single business organization, Cornice’s business level strategy is focused
differentiation to produce high capacity storage products for the emerging consumer
electronics market. It does not participate in any other market segments other than the
mobile market. Cornice has entered into various strategic partnerships with other captive
manufacturers to increase its market share and achieve its strategic position.
2.4.3 Competitive Position
2.4.3.1 Value & Cost Drivers
The value drivers for the hard disk drive industry are shown in Exhibit 3. Seagate is the only
firm that provides all the value drivers to customers. The next competitors that even come close
to fulfilling the same value drivers as Seagate are Western Digital and Hitachi GST. In the
mobile segment, one of the most important drivers is the physical size of the drive because of the
mobility; although important, only three out of the seven competitors have this value driver.
Similarly, plug & play compatibility is provided by only two out of all the main competitors.
For the desktop and enterprise segments, value drivers are almost standard across the board.
Seagate alone provides customization and integration to its customers. All other value drivers
are provided by competitors who participate in these two segments.
The cost drivers are similar across the industry, with the primary ones being raw materials for the
hard disk drives, which include thin film, read/write heads, and substrates. Manufacturing and
assembly costs are also part of variable costs. Fixed costs include the basic infrastructure costs
which are not a huge percentage of the total costs.
Seagate reduced its cost by reusing the manufacturing lines and components across multiple
product lines (Seagate Technology, 2005). This enables it to withstand changes in market
demands. Western Digital’s cost savings occurred in lower assembly costs by improving
manufacturing processes (Western Digital, 2005).
Research & Development costs vary across the industry. Seagate’s strategy has been technology
leadership. It invests 8.5% of its revenue in R&D, which is the highest in the hard disk drive
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industry. Western Digital invests in 6.5% of its revenue in R&D. The breakdown information is
not available for the other competitors.
2.4.3.2 Capabilities
Seagate’s use of common core components allows it to use the same manufacturing lines for
various products. This ability is valuable because product demand fluctuations do not affect the
firm much as compared to competitors and also provides cost savings due to economies of scale.
This was clearly evidenced when Apple decided to covert its introductory iPod products to use
Flash-based storage; Seagate was able to reuse its manufacturing lines to build other products,
Hitachi GST, on the other hand, experienced a 79% drop in profits due to its inability to cut
costs. Competitors such as Toshiba and Fujitsu are picking up on Seagate’s expertise and are
beginning to use standard components in their manufacturing lines to cut costs. The acquisition
of Maxtor allows Seagate to take advantage of Maxtor’s superior relationship with its retail
channels, something Seagate is trying to improve.
2.4.3.3 Resources
Seagate and Western Digital have manufacturing operations in different parts of the world.
Seagate has been issued 2710 patents and over 1000 pending patent applications, which allows it
to safeguard its technology from competitors for a period of time. Maxtor has traditionally been
the firm that has focused on the “cool factor”3 in development. This attitude has led the
company to attract some of the best engineers in the industry possessing excellent innovative
skills. Maxtor also has an excellent retail channel. The result of innovative products and superb
retail management leads to a higher brand value for Maxtor, as compared to competitors.
2.4.4 Willingness to Pay
Three methods are used to calculate customers’ willingness to pay: revenue method, ASP
method and qualitative method4. Exhibit 5 and Exhibit 6 show the calculations for the first two
methods. Additional data (revenue and cost per vertical segment for the year 2005) is required to
draw accurate conclusion from the quantitative analysis.
3 Cool Factor is a feature that is “fun” to develop from an engineering standpoint but not a value driver for the customer. 4 Qualitative Analysis is also included in this paper based on conversation with Prof. Madsen
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Definitions
• Cost: The characteristics of the products listed in each market segment (Exhibit 3 and
Exhibit 2) are different, resulting in different costs to manufacture these units. Hard disk
drive manufacturers do not disclose the cost of manufacturing per market segment. To
calculate the willingness to pay, costs to produce one unit across all vertical segments are
assumed to be the same. The cost calculations for Seagate, Maxtor and Western Digital
are shown in Exhibit 7. Revenue information is not available for the other firms in the
industry.
• Revenue: Firms do not report breakdown of revenue by each vertical segment. Gartner
Research has computed the revenue contribution per vertical segment per firm for the
year 2004 (Monroe, 2005). Revenue data per vertical segment for each firm is not
available for year 2005.
• Average Sale Price (ASP): Firms do not report ASP per vertical segment. The ASP per
vertical segment per firm (ASPVS/Firm) is obtained from Gartner Research (Monroe,
2005). Again, information is available only for the year 2004. The formula used to
calculate ASP per vertical segment is shown below:
ASPVS = Revenue of vertical segment / Units shipped in vertical segment
In both quantitative methods, outstanding inventories and work in progress are not taken into
account in cost calculation. Also, accounts receivable and doubtful accounts are excluded from
revenue calculations in both the methods.
Quantitative Calculations
1. ASP Method:
The basis of this method is that ASPs will continue to drop at the historical rate. The year 2004’s
ASP is used to project 2005’s ASP per firm for each vertical segment. The four quarter trailing
average is used to compute the ASP for 2005 (as shown in Exhibit 5).
Assumptions & Drawbacks: This method assumes that the ASP change in the industry is
distributed uniformly across all vertical segments. This assumption makes the model fail when
there are different market pressures in different vertical segment. For example, the desktop
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market with high percentage volume is facing severe price pressure whereas the Enterprise
market is seeing an increase in price due to certain value drivers. With this method penalizes the
Enterprise market at the expense of the Desktop market segment. This makes the final analysis
inaccurate.
2. Revenue Method (Using Revenue and Volume)
Definitions: Product factor is an indication of the premium/discount (with regards to market
price) that is paid for the firm’s product. Product Factor is calculated as follows,
Product Factor = % Rev. contribution of firm for a Vertical Segment / %
volume share of the firm in the same vertical segment
Contribution factor indicates the revenue contribution of 1-unit of volume by the vertical
segment to the revenue of the industry. Contribution Factor is calculated as follows,
Contribution Factor = % Revenue Contribution of Vertical Segment to Industry
/ % volume of units shipped in the same Vertical Segment
Assumptions & Calculations: Since data is not available for 2005, it is assumed that the product
factor and contribution factor are the same for both years. Using this assumption, % revenue of
the firm per vertical segment for 2005 is calculated as follows:
% revenue per VS for a firm = % volume shipped by firm in VS * Product Factor
Revenue per VS = % volume shipped in VS * Contribution Factor
Implications of Assumptions: By assuming the product factor is the same, the product qualities
of the firms are expected to remain the same for both years. For example, if a firm is charging a
premium in 2004, for higher product quality, this assumption implies that the quality of the
product in 2005 is at the same comparable level. A constant contribution factor inadequately
models price variations. For example, an increasing pricing war in the desktop market can
reduce the contribution factor for the Desktop vertical segment which is not taken into account
by this model.
Willing to pay analysis based on Revenue Method
• Desktop Computing (PC Segment): The average market price is $59. Seagate, Western
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Digital and Samsung are selling below the market price. These firms focus on cost
leadership and are able to price their products at a discount compared to market price.
Seagate has operational efficiencies which enables it to reduce its cost. Hitachi and
Maxtor charge a premium for their products; Maxtor because of product innovation and
Hitachi GST based on its brand. Due to the price sensitivity of this market, Hitachi GST
has a lower market share compared to remaining firms.
• Mobile Segment: Value drivers in this segment are shock tolerance, low power
consumption and form factor. Seagate, Western Digital and Samsung, in tune with their
cost leadership strategy, have a lower price for the products in this vertical segment. The
notebook product segment is price sensitive. Hitachi GST, Toshiba, and Fujitsu charge a
premium for their products; Hitachi GST and Toshiba both forward integrate, enabling
them to charge a higher price for their products. Hitachi GST, Toshiba, and Fujitsu also
have better brand recognition and strategic relationships with customers which enable
them to charge a premium.
• Enterprise Segment: The market price in this segment is $169. Seagate is the only firm
demanding a premium in this segment based on its product quality, reliability, and
performance5. The other firms’ strategies have been to compete on price, which is not a
value driver in this segment. This explains the higher percentage of market share for
Seagate.
Qualitative Analysis
Given the limitations of the above methods, a qualitative approach is also used to compare the
different firms’ willingness to pay. In this method willingness to pay is based on the product
segments shown in Exhibit 2.
• Personal Computing: This segment is price sensitive; Exhibit 8 shows the variance based
on channels and channel promotions. The Personal Computing segment is also
commoditized so maintaining product differentiation is very valuable. However, any
product differentiation is immediately imitated. Differentiation provides a temporary
buyer surplus (V-P) assuming price does not change for the new features. With imitation,
5 http://www.seagate.com/newsinfo/newsroom/awards/
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the next factor the firms can use to differentiate themselves is by reducing P and hence
increasing V-P. The firms that can reduce cost and maintain a reasonable (P-C) will have
a sustainable competitive advantage as the market will eventually settle on a P. Seagate
and Western Digital have maintained lower costs for their products (Seagate 10K, 2005
and Western Digital, 2005). This has enabled them to have a lower P compared to their
competitors. In terms of value, Seagate has consistently been the first to introduce new
products and features to the market6. This has enabled Seagate to maintain a high
percentage share in the Desktop PC products and steadily increased its percentage in the
Notebook product space (Seagate 10K, 2005). OEM vendors are the main customers in
this segment. Strategic relationship and brand value become critical in this market
condition. With a lack of sustained product differentiation, strategic relationship and
brand recognition become a very critical factor in the willingness to pay framework.
From their partnership activities7 and Seagate 10K, 2005, it is evident that Seagate
maintains strategic relationship with key vendors.
• Enterprise Computing: This segment relies on product quality and reliability. Customers
pay for these value drivers. Seagate is the leading player in the Enterprise market
segment and it is further increasing its market share in this segment. Seagate products
have won several accolades for quality8 and reliability9, as is the case for Maxtor (Maxtor
10K, 2005). Seagate and Maxtor together have 65% of the market share (Figure 3).
Fujitsu and Hitachi GST provide software solutions for Enterprises. They have been able
to sustain in this market by forward integrating. The strengths of Fujitsu and Hitachi
GST in the software services industry would be a factor in their ability to roll in the hard
disk drives as part of the complete solution. This strength has not been analyzed.
However, firms in the Enterprise market do prefer to purchase packaged solution from
one vendor, as it can be customized and more importantly troubleshooting is easier.
Firms do not have to deal with finger pointing if the systems do not work. Fujitsu and
Hitachi GST, whose products are not rated as the best products, are able to sustain the
market share due to the forward integration.
6 http://www.seagate.com/cda/newsinfo/newsroom/releases/disc/1,4717,1%5e3,00.html 7 http://www.seagate.com/cda/newsinfo/newsroom/releases/search/1,1125,1%5e0,00.html 8 http://www.seagate.com/cda/newsinfo/newsroom/releases/disc/1,4717,1%5e3,00.html 9 http://www.seagate.com/cda/newsinfo/newsroom/releases/search/1,1125,1%5e0,00.html
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• Consumer Electronics: This segment consists of the desktop non-PC vertical segment
(DVRs, Digital Camera and MP3 players) and the mobile handhelds (PDAs and cell
phones). Masaki, et. al. 2005 suggests that form factor, shock tolerance, and low power
consumption are the primary value drivers in this segment. As observed in the other
segments, due to commoditization or buying patterns, strategic relationship becomes a
differentiating factor. Firms’ willingness to pay is from the value drivers, but the
eventual choice is made by the strategic relationship that is established between the firms
and the OEM vendors/handheld manufacturers. From Exhibit 3, it can be seen that
Seagate provides all the value drivers but are not leaders in this market space9. Hitachi
GST, Fujitsu and Toshiba have significant alliances that has enabled them to gain in the
consumer electronics segment.
Survey Analysis
Two surveys were conducted in the consumer electronics segment. The detailed survey results
and the methodology used are shown in Section 10. Table 2 shows the summary of the results
from Survey 1.
PDA ($199, 32MB storage, 12 days standby time)
Cell phone ($199, 512MB, 6 hours talk time)
MP3 player ($149, 1GB, 12 hours playback time
Storage capacity $10-$25 (1GB) $5- $10 (2 GB) $5 - $10 (10 GB)
Shock Tolerance $5-$10 < $5 < $5
Twice the battery life $5-$10 $5- $10 $5 - $10
Table 2: Summary of Market Research Survey
Table 2 shows the price customers are willing to pay, assuming the size of the product
(Cellphone/PDA/MP3 player) remains the same. These value drivers show that the hard disk
drive industry is bringing in less than 10% value to the product. Exhibit 9 shows how the
willingness to pay eventually tapers down even as the capacity or battery life is increased for
each product. The effective price in this table subtracted by the incremental cost required to
provide the specific feature is the value of the feature. An interesting point in the case of shock
tolerance is that most manufacturers/service providers offer a warranty for an extra $2 per
month. Given the usage pattern that these products are replaced every two years coupled with
the cheap warranty, the value of the shock tolerance feature is diluted. A point that is not
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apparent in the survey is regarding the contributors of power consumption. A 20% reduction in
power consumption of a hard disk does not translate to a 20% increase in battery life of a cell
phone or PDA. As in these devices, the power is primarily consumed by the LCD and
processors. To achieve double the battery life requires a tremendous amount of savings of
battery consumption from the hard disk drives. This might be prohibitively expensive or
physically impossible.
2.4.5 Comparative Financial Analysis
Table 3 shows the comparison of the key ratios for Seagate and its competitors; the
corresponding ratios for the hard disk drive industry and the market are also shown in the table.
Toshiba and Fujitsu also operate in a number of different consumer and enterprise businesses and
do not specify the contribution of the hard disk drive business unit; the comparison is done with
the company as a whole.10
• Gross and Net Profit Margins: Seagate enjoys the highest gross and net profit margins
as compared to its competitors. Maxtor, on the other hand, is one of the lowest in the
industry, which can be attributed to low operational efficiencies and high COGS. Note
that the “Industry” column in Table 2 includes other more profitable storage solutions
along with the hard disk drives.
• Return on Equity (ROE): Seagate and Western Digital are providing the highest ROE
and Maxtor the lowest in the industry.
• Return on Assets (ROA): Same is true for the ROA with Seagate and Western Digital
being the leaders and Maxtor on the trailing end.
• Inventory Turnover: Western Digital has the highest inventory turnover, followed by
Maxtor and Seagate. However, the trend for Maxtor has been consistently decreasing,
indicating issues with its operations and causing it to maintain higher and higher
inventories. In spite of high inventories, Seagate is very consistent with its turnover rate.
10 Financial information for Hitachi GST and Samsung do not provide any additional information for this comparison. Cornice is privately held and does not publicize its financial information.
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Seagate Western
Digital
Maxtor
(2004)
Toshiba
Corp.
Fujitsu
Corp.
Industry Market
Gross Profit Margin 28.30% 19.90% 13.70% 26.40% 26.20% 38.50% 48.62%
Pre−Tax Profit Margin 9.69% 5.56% -4.80% 1.89% 21.89% 10.60% 11.16%
Net Profit Margin 9.40% 5.50% 0.00% 0.80% 0.70% 9.33% 7.37%
Return on Equity 27.82% 28.81% -31.21% 11.52% 21.89% 14.20% 15.10%
Return on Assets 13.48% 12.73% -8.61% 2.42% 6.14% 9.10% 2.50%
Inventory Turnover 12.30 19.33 14.65 6.66 6.96 9.5 8.4
Total Asset Turnover 1.64 2.65 1.57 1.28 1.26 1 0.4
Current Ratio 1.97 1.44 1.14 1.09 1.33 2.15 1.33
Debt Ratio 0.14 0.03 0.22 0.24 0.30
Quick Ratio 1.03 1.09 0.77 0.62 0.62 1.8 0.9
Total Debt to Equity 0.29 0.08 0.80 1.16 1.06 0.09 1.29
Profitability Ratios
Operations
Financial Ratios
Data Source: Hoovers based on number for 2005
Table 3: Comparison of Key Ratios
• Total Asset Turnover: Western Digital has the highest asset turnover rate, followed by
Seagate. Western Digital’s total asset turnover is falling over the years while that for
Seagate has stayed very consistent.
• Current Ratio: Seagate has the highest current ratio as compared to its competitors,
indicating healthy cash flow and enough funds to meet its immediate liabilities. Maxtor,
on the other hand, is looking at a very thin margin to meet its current liabilities.
• Debt Ratio: Seagate and Western Digital have a very healthy debt ratio and have been
reducing their debt liabilities over the years. Maxtor is increasing its debt, possibly
leading to serious solvency problems.
• Total Debt to Equity Ratio: Maxtor has a high debt to equity ratio that has been
increasing over the years. Seagate and Western Digital’s superior financial position is
clearly seen through their low and decreasing debt to equity ratio.
Exhibit 11 shows the historical value of the key ratios. Exhibit 12 shows the historical trend of
the key market ratios for Seagate and its competitors.
2.4.6 Implications of Competitive Analysis
2.4.6.1 For Industry
The hard disk drive industry is highly concentrated with the top six firms in this industry
comprising 98.8% of the total market share for all market segments. Structurally, the industry is
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composed of independent firms whose primary business is to build hard disk drives and captive
firms that are part of larger multi-business organizations. The primary market for the hard disk
drive industry, the desktop PC market, has commoditized, causing prices to decrease rapidly.
Additionally for the past few years, the hard disk drive industry has been plagued with excess
capacity, further exacerbating price competition between competitors in the industry. Volatile
pricing and fierce competition has led to consolidation among existing firms in the industry to
attain economies of scale and also provide some price stability.
2.4.6.2 For Rivalry
Rivalry in the hard disk drive industry is very fierce. The independent firms whose primary
business is to manufacture hard disk drives have very high stakes in this industry and are willing
to engage in intense price competition to defend their position in the market. Any unique value
offered by a single firm is easily imitated in a very short time by rivals in the industry and cannot
provide a sustainable business advantage, forcing firms to compete on price. Most of the
competitors in the hard disk drive industry are focused on a hybrid strategy between cost
leadership and broad differentiation. The mobile market is the fastest growing market segment.
Cornice through its technology, strategic relationships and sole focus on this segment has the
potential to be a formidable competitor in the market, further increasing rivalry.
2.4.6.3 For Seagate
With the acquisition of Maxtor, Seagate will attain more than 50% market share in the Desktop
market and more than 65% market share in the Enterprise market segment. The acquisition will
enable Seagate to extend its operating efficiencies to Maxtor and further increase its economies
of scale to compete effectively in the market. Western Digital in particular, whose primary
business is disk drive manufacturing, may engage in more intense price competition to attract
customers away from Seagate. The acquisition itself provides Seagate’s competitors the
opportunity to gain market share as customers try to balance their suppliers reducing over-
dependence on a single supplier.
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2.5 Intra Industry Analysis
2.5.1 Strategic groups
Three strategic groups exist based on values provided to the customers.
o Quality & Reliability (QR) Group: This group serves the Enterprise market segment.
Customers use hard disk drives for archiving business critical information in network
attached storage devices. This group requires high quality and reliable disk drives.
o Form Factor Group: This group primarily serves the mobile market segment.
Customers in this group require more storage in reduced area with low power
consumption and other features such as skip protection.
o Price Sensitive Group: This group serves the desktop computing market segment and
also includes the notebook products from the mobile computing segment. The end-
consumer for this group is extremely price sensitive and hence this group requires
constant price reductions.
Each strategic group spans multiple market segments (Exhibit 2) and have multiple value drivers
(Exhibit 3). The values provided to a strategic group are also of relevance to other market
segments. The analysis in this section identifies the primary value driver for each.
2.5.2 Threats and Opportunities
The merger of Seagate and Maxtor creates an opportunity for other competitors in the QR and
Price Sensitive groups. OEMs typically do not like to be dependent on a single manufacturer for
their hard disk drive needs and prefer to distribute volumes across different suppliers. The
merger would thus enable Seagate’s competitors to gain some of Maxtor’s market share in the
QR and Price Sensitive groups.
The QR Group constitutes about 10% of the total market today and is not expected to grow in
the next three years (Monroe, 2005). The opportunities in this market are minimal.
Governmental regulations on data encryption standards and disposal of disk drives are expected
to have minimal impact on the firms changing their strategies.
The Form Factor Group, accounting for 30% of the total units currently shipped, is expected to
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grow about 350% over the next three years (Monroe, 2005). Increased usage of cell phones and
constant innovation to package more value into cell phones and other mobile devices create a
unique opportunity for the hard disk drive industry. Applications such as video, live television,
and music available via cell phones increase the need for low power consumption and high
storage capacity disk drives. Flash-based storage devices are the biggest threat in this segment
for storage sizes less than 256MB (Exhibit 3); current hard disk drive technology cannot
economically compete below 256MB. Hard disk drive manufacturers are investing significant
capital in R&D to improve the economics and characteristics of hard disk drives. Particularly for
Seagate, it has invested $100 million in a new technology called PROBE and is expected to
further invest an additional $300 million with no guarantees of success (Merian, 2005). If the
technology does prove viable, Seagate will be able to effectively compete against Flash
technology. A huge opportunity exists for new firms to capture the market, particularly in this
strategic group, through innovations in disk drive technology.
The Price Sensitive Group can be subdivided into the desktop and the notebook segments. The
desktop segment consists of the PC and non-PC markets. The PC market is the single largest
segment in the hard disk drive industry, constituting about 60% of the revenue. The non-PC
segment expands the markets for hard disk drives and is expected to grow by 50% over next
three years. The notebook segment constitutes approximately 15% of the market and is expected
to increase by 33% in the next three years. These growing markets provide an opportunity to
capture market share. However, the biggest threat in this strategic group is constant price
reduction which forces firms to continually reduce costs to maintain profit margins.
Seagate’s strategic move to acquire Maxtor is a horizontal merger. The acquisition provides
Seagate quick access to Maxtor’s fully operational, state-of-the-art manufacturing plants. After
the acquisition, Seagate will have higher manufacturing capacity to aggressively compete in the
different strategic groups, particularly the Form Factor Group where its current market share is
only 14%. Seagate will also gain access to Maxtor’s excellent retail channels, enabling it to
further strengthen its position in the Price Sensitive Group. The technical economies
(Lubatkin’s source of strategic relatedness) obtained by Seagate enables it to increase its
revenues in the Form Factor and Price Sensitive groups. Finally, through consolidation
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Seagate becomes even more powerful, achieving pecuniary economies, in the QR and Price
Sensitive groups, reducing the speed at which prices decline. Seagate can potentially increase its
market share in the QR Group to 65% and in the Price Sensitive Group to 50%.
2.5.3 Channels
The channels play a very important role in this industry. From the above discussion, price is a
very critical factor in this industry. The price paid by the end customer is controlled to a good
degree by the channel. Exhibit 8 shows the variance in pricing for a product manufactured by
one firm ($95 - $192, for Seagate). It also shows the variance in pricing for similar products with
the same features manufactured by two firms ($99 - $132, for Western Digital). This price
variance is a factor of channel relationship of the firm and channel promotions.
Maxtor has a good relationship in the retail channel. Seagate’s weakness in the retail channel will
be improved after the strategic move.
2.6 Failure Analysis
The hard disk drive industry has traditionally been extremely competitive with low profit
margins, requiring significant capital investments and ongoing investment in R&D, and
manufacturing processes. Over the last 20 years, the industry has gone through a significant
structural change from over 20 manufacturers in 1989 to only seven in 2005. Consolidation in
the industry has enabled manufacturers to enjoy manufacturing economies of scale and also help
slow down the downward spiral of prices.
Conner Peripherals had a reputation for high quality disk drives (Red Hill, 2005). However,
Conner could not continue the high investments in R&D and was slipping off on product
innovation. Conner drives retained their reliability, but did not deliver the same levels of
performance as other competitive products. This eventually led to Conner’s exit from the
industry in 1995 through an acquisition by Seagate.
In 2001, Quantum exited the industry through its acquisition by Maxtor. The deal was worth
$2.3 billion. According to the Director of Finance for Seagate Technology, the merged
organization maintained its market share of 33% to 36%. In the early 1990s, Quantum changed
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its focus from providing high-performance drives to providing larger capacity drives. The move
eroded market share and brand for Quantum; thus, the drives were primarily used in inexpensive
brand-name PCs. Quantum also introduced a new “TM” model, which offered better throughput
but slower seek time, and called it the "Fireball" drive, the name previously reserved for the
high-end models. Even though the Fireball drives caught up with the performance characteristics
demanded by the customers, this mistake further cost them market share in the enterprise
segment. By late 2000, personal computer sales were dropping and hard drive manufacturers
were getting squeezed, Quantum could not continuously reduce costs and finally exited the
industry.
In 2002, IBM exited the industry through a joint venture agreement with Hitachi (Hales, 2002) to
combine their disk drive operations into a joint venture with a majority (70%) of the newly
formed organization Hitachi GST owned by Hitachi. IBM introduced the first disk drive based
storage to the market called Winchester Drives and its drives were considered the best in the
industry with unmatched performance and reliability. However, performance and quality
problems with the Deskstar product lines led to a class action law suit against IBM (Inquirer
Staff, 2005). Faced with plummeting market share and mounting losses, IBM (Hales, 2002) sold
off the desktop and notebook drive divisions to Hitachi. Hitachi GST is trying to restore
consumer confidence in these hard disk drives.
2.7 Threats and Opportunity Analysis
All opportunities and threats have been covered in other sections of the paper.
2.8 Summary of External Analysis
The hard disk drive industry is a moderately attractive industry with the mobile segment
projected to grow over 300% in the next few years. Existing hard disk drive manufacturers are
positioning themselves strategically to capitalize on this opportunity by introducing disk drives
with better form factor suitable for mobile applications. Flash-based storage technology is a
strong substitute for hard disk drives; currently economically meeting the needs of the low end
market; with continued technological advancements, this technology has the potential of being a
viable alternative for disk drives.
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Year-over-year decline in the price of storage and significant manufacturing overcapacity has
made rivalry in this industry extremely fierce. Competitors have to continuously invest in
research and development for storage technology and improving manufacturing processes to
maintain their profit margins. Commoditization provides very little opportunity for individual
firms to differentiate themselves in the market; any such attempts are immediately imitated by
rivals. Seagate has been a pioneer in this industry; it was the first to introduce the 5-year
warranty on all its hard disk drives. Competitors also started offering the 5-year warranty on
their products and now that level of warranty has become a standard in the industry. Seagate is
currently introducing a technological innovation called perpendicular recording technology for
increased storage capacity. Other firms are also expected to introduce their own competitive
hard disk drives very soon.
Over the past few years there has also been significant consolidation in this industry. Large
established players like Quantum and IBM have exited the industry due to difficulties in
continuing the large R&D expenditures required to keep up with competition. Consolidation has
provided some price stability in the market and enables firms to enjoy larger economies of scale
and decreases manufacturing costs.
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3 INTERNAL ANALYSIS
3.1 Business Definition/Mission
Seagate seeks to dominate the traditional hard disk drive markets – enterprise, desktop, and
mobile – expanding its presence in non-traditional market segments such as automobile and
consumer application by leveraging its expertise.
3.2 Management Style
Seagate internally and externally frames its market position as the dominant storage provider in
the information age. Seagate’s theme of “Setting Storage Free”11 is embodied in a quote from
Bill Watkins, “Storage used to be stuck inside a box. Now we’re freeing it to go anywhere you
go.” Seagate’s commitment to “ownership and vertical integration” and advanced technology
development helps drive economies of scale and employee loyalty through highly structured and
regimented firm discipline. Seagate’s management style is highly centralized and top down.
Maxtor has a heterogeneous and weak central management structure. Management power
resides instead at campus locations of previous acquisitions such as Quantum and DEC. Maxtor
senior executive management has had a great deal of turnover. For example, the Maxtor CFO
position has changed three times in the last five years (Director of Finance, 2006).
3.3 Organizational Structure, Controls and Values
Seagate and Maxtor are internally organized around the development of disk drive technology in
each segment they serve. Figure 4 show the manufacturing process workflow for hard disk drive
manufacturing.
11 http://html.viewstream.chime.com/seagate/ssf/setting_storage_free_300k.asx
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ProductionTesting
Research,Heads&MediaMMC
Operations &Supply ChainMgmt
Enterprise, Personal & Consumer Divisions
Chips, PCB, Servo Control electroncis for :
� IDE� SCSI
� SATA
� Fibre Channel
� Motors
� Actuators� Heads
� Read/Write
Channels
� Pilot line
Development
� Part Qualification� Mass Production
offshore
InterfaceElectronicsIntegration
FirmwareDevelopment
CustomerSpecific
FirmwareCustomization
Head, DiskAssembly
Figure 4: Hard Disk Drive Manufacturing Process
A heads and media advanced technology team develops a set of assemblies that deliver particular
cost, areal density, access time, and form factors required by product development teams in the
enterprise, desktop, and mobile segments. Seagate utilizes research and heads & media divisions
to provide this based technology while Maxtor uses an outsourced model and utilizes a wholly
owned subsidiary, MMC. Each segment product development team develops a set of electronics
for servo control and interface protocols for the particular market segment. Product development
teams add additional value through customer configurable customizations. The Seagate
executive management team is shown in Figure 5. Executives hold each Seagate GM to a
different set of financial metrics depending on the market segment.
Sherman Black,
VP&GM
Enterprise
Carl Chicca,
VP&GMPersonal
Computer
James Druckrey
VP&GMBranded
Solutions
Brodie Keast
SVP&GM
Consumer
Phil Pollok, SVP
New Business
Initiatives
Jim Chirico
SVP
Disk Drive
Operations
Mark Kryder
Senior VP/CTO
Research
Jerry Glembocki
Senior VP
Heads & Media
Dave
Wickersham
COO
Bob WhitmoreSVP
Product
Development
Charles Pope
EVP
CFO
William Hudson
EVP
Counsel
William
Watkins
CEO
Figure 5: Seagate Executive Management Team
Seagate’s powerful centralized decision-making structure maximizes part commonality across
market segment drives and sets a quarterly accessed common set of employee objectives.
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Maxtor employees have not had employee appraisals in three years once poor profit performance
ended raises. Significant integration problems exist in Maxtor. For example, former Quantum
employees at the corporate headquarters in Milpitas, CA earn 20% more then Maxtor employees
doing the same job. Maxtor’s product roadmaps are largely driven by engineering managers in
different locations with few company controls. Maxtor 500 GB drives cost $50 more then
Seagate drives due to needless engineering extras not visible to the customer (Director of
Finance, 2006).
Both Maxtor and Seagate have competitive compensation packages for their US-based
employees that comply with US labor laws. Seagate has gone the additional step of joining the
United Nations Global Compact12, but there is no mention of it on the Seagate intranet despite is
prominence on the company web page.13
3.4 Strategic Position Definition
3.4.1 Corporate Level Strategy
Seagate is a single business with the broadest portfolio of disk drive products in the industry in
each of three market segments:
o Enterprise Segment – Servers, mainframes, workstations
o Desktop Segment
o PC segment – Desktop computers
o Non-PC segment – Digital Video recorders, MP3 players, Gaming
o Mobile Segment – Notebook computers, hand held devices (PDA, Cellphones)
Seagate’s corporate vision is to be the market leader in the hard disk drive industry. Seagate’s
strategy has been cost leadership, customer focus and product innovation. The acquisition of
Maxtor is a horizontal merger with pecuniary economies and technical economies.
Seagate’s specific drives and Maxtor’s comparable drives are shown in Exhibit 13. Note the
significant overlap in the enterprise and desktop segments. The Barracuda drives from Seagate
12 http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html 13 http://www.seagate.com/newsinfo/citizenship/index.html
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dominate the industry relative to Maxtor’s DiamondMax line. Similarly, the Seagate Cheetah
line price and performance drastically outpaces the Maxtor Atlas and MaxLine offerings.
Seagate introduced multiple new products in each application segments, Exhibit 14. Each
segment requires different combination of form factor, reliability, performance, and workload
parameters (Director of Finance, 2006). These are summarized in Exhibit 15. The Seagate
business portfolio focuses on each market segment and has no unrelated diversifications.
Seagate’s introduction of “CompactFlash” form factor hard drives for digital cameras is also
consistent with Seagate’s storage mission. Seagate has not made any attempts at forward
integration.
Firm alliances with OEMs like HP, Dell, IBM, and EMC contributed 72%, 64% and 63% of
revenue in the years 2005, 2004 and 2003 respectively. Seagate utilizes a network of distributors
to provide products to smaller OEMs, retailers and system integrators (Seagate Technology,
2005).
Hig
h
1” Drives, Mobile market segment, Desktop non-PC, Retail Solutions, Pocket Drives,
Compact-Flash Hard drives
Enterprise market segment, Desktop PC market segment
High Low
Bu
sin
ess
Gro
wth
Rate
�
Low
Relative Position �
Table 4: Seagate BCG Matrix
Table 4 shows Seagate’s product portfolio in the BCG matrix. Enterprise and Desktop disk
drives sold to OEMs are the cash cow products. Seagate uses cash from these segments to fund
small form factor products in mobile market segment (PDAs) and the Desktop non-PC market
segment (digital music players, digital cameras, and set-top-boxes). These segments have grown
tremendously in the past two years (Monroe, 2005) and are expected to grow at an even higher
percentage (533% for cell phones and PDA, 62% for Desktop non-PC market segment). Hence
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they are the stars for Seagate. Due to reliability and portability issues with Seagate’s venture into
CompactFlash form factor drives, the product appears to be a question mark in its product
portfolio.
3.4.1.1 Seagate and Maxtor’s Current Strengths and Weaknesses
Seagate and Maxtor individual strengths and weaknesses are summarized in Exhibit 17.
3.4.1.2 Acquisition Effect on Stakeholders
Seagate gains considerable market share with the acquisition of Maxtor in the enterprise and
desktop market segments. New concentration ratio figures are CR3Desktop = 79% and CR3Enterprise
= 98%. Seagate eliminates a competitor and therefore gains an increased market presence.
Seagate gains incrementally more power over both buyers and suppliers. It also obtains the new
Maxtor assembly plant in China. Details of the synergies from this acquisition are discussed in
Section 4. Shareholders in both the companies have benefited since the announcement of the
acquisition as shows in Exhibit 38.
3.4.1.3 Porter’s Test for Acquisition of Maxtor
• The Attractiveness Test
No substitutes exist for disk drives in the enterprise, desktop and mobile applications.
The market is projecting rapid growth of 20% in 2007 (Hoovers – Seagate, 2006 and
Hoovers – Maxtor, 2006). Enterprise buyers have a lot of bargaining power, driving
intense price and margin competition. The consumer application’s high growth rate and
high margins make it a very attractive segment. DVRs, digital cameras, and HDTV have
attractive increasing storage requirements. The disk drive industry technology trends are
mature. Even though the areal density curve is not experiencing 100% year over year
growth, the number of applications requiring storage are increasing, making it a very
attractive market.
• The Cost-of-Entry Test
In acquiring Maxtor for $1.9B in stock, Seagate is expecting significant and immediate
operational savings, $300 million in the first year (Seagate/Maxtor, 2005). Seagate’s EPS
is expected to increase from $0.52 to $1.64, a significant increase in shareholder value.
Maxtor’s significant operational inefficiencies have driven down market value. The DCF
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analysis shows that Maxtor has a value of $2.6B, considerably higher than $1.9B.
Maxtor and Seagate’s stock prices increased after the announcement which indicates the
market’s opinion that this is a good strategic move for Seagate and hence the acquisition
passes the cost-of-entry test.
• The Better-Off Test
Seagate’s acquisition of Maxtor increases its overall disk drive market share and
improves its overall position in the industry. The stronger position gives it more power
over suppliers and therefore drives better prices for raw materials. Seagate also gains
access to Maxtor’s well developed retail channel where Seagate needs to improve its
reach into the consumer market. This acquisition meets the better-off test.
3.4.2 Business Level Strategy
Seagate is a single business focused on hard disk drive manufacturing. The business is broken
down into four business units that address the market segments the firm is participating in. The
following lists the business units and a brief description of each:
• Enterprise Business Unit: This segment is targeted mainly at large OEM accounts
concerned with performance and reliability. Seagate’s market differentiation strategy is
based on customization and strategic relationships with the customer. Seagate provides
superb service and custom drive images that reduce costs for large OEM accounts. Close
relationships add additional value for the customer. Quality and reliability are not
differentiating factors because these factors are standard among industry competitors.
• Personal Computing Business Unit: This segment includes desktop PCs and notebooks
and is targeted at individual users who are price sensitive. Seagate’s strategy for this
segment is cost leadership. To maintain its cost leadership, Seagate spreads its product
distribution across OEMs and retailers such that no distributor can force a price control
on the firm. For notebooks, it also uses its technology leadership to get better form factor
since size and weight is a bigger factor. Seagate’s technology leadership enables it to
provide shock tolerance for its products, thus increasing product quality and adding value
to customers.
• Branded Solutions Business Unit: Branded Solutions is a relatively new business unit
in Seagate that was designed to complement the personal computing market segment by
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bundling Seagate product offerings. The strategy here is to increase the firm’s brand
awareness in the retail channel.
• Consumer Business Unit: This includes products from the Desktop market segment
(non-PC) and Mobile market segment (PDAs and cell phones). Consumer electronics is
quickly becoming a huge segment for the hard disk drive industry because of the increase
usage of digital video recorders, MP3s, cell phones, and digital cameras. Seagate
currently has a small market share in this market segment but is hoping to expand by
using its technology leadership to improve form factor and shock tolerance. Seagate’s
technology leadership has enabled it to be one of the first in the industry to release
products using perpendicular technology. It is involved in research of new technologies
like PROBE for possibilities of increasing disk capacity yet minimizing form factor. To
expand its market share in the consumer segment, Seagate must improve its strategic
relationship with retail channels as it is currently weak in this area and handheld
manufacturers.
Seagate’s acquisition of Maxtor will affect the business level strategies of each business unit to
some degree. In the enterprise segment, the combined company can potentially enjoy a market
share of 65%, with Fujitsu as the next closest competitor at only 20%. Seagate could leverage
the pecuniary economies to exert its new market power in this market segment. The personal
computing business unit of Seagate will also increase its market share after the acquisition.
Seagate’s market share in the Desktop market segment can potentially increase from 32.5% to
51.1%. Seagate is eliminating a competitor in this segment and making it even bigger compared
to other competitors. The acquisition will reduce price wars because Seagate now has a stronger
market position and can use it to dictate prices if it needs to. For branded solutions and the
consumer business units, Seagate and Maxtor currently have little presence in this area.
However, Maxtor has strong relationships with its retail channels and strong brand recognition
among consumer groups in this segment. Seagate’s current strategy is to grow its market share
in this segment and it can do so by leveraging Maxtor’s retail channel relationships.
Seagate’s overall corporate level strategy is a single business with product roadmaps that keeps
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customer requirements in mind and does not emphasize the importance of the “cool factor”.14
The firm has strategic relationships with customers and works closely with them to ensure that
new products meet customer needs. This also allows Seagate to learn of new applications for
hard disks early on and stay ahead of competitors. Seagate’s corporate strategy trickles down to
each business unit, but each unit executes the strategy differently to achieve its goals. However,
its goals are aligned with the overall corporate strategy.
3.4.3 Resources and Capabilities
Seagate disk drive development and manufacturing have incorporated extensive learning into its
processes and procedures to drive down cost and improve quality. Information sharing across
the global organization has maximized opportunities for common part sharing across different
products and different product lines. This aspect of manufacturing efficiency has been critical
for the very low margin Personal computing business unit. Development and manufacturing
focus on specific and common cost and performance targets have maximized learning and
enabled Seagate to achieve significant manufacturing cost efficiencies.
Seagate uses the same manufacturing lines to produce drives for different product lines. A single
line supports different form factors and different characteristics such as areal density, access
time. For example, the same manufacturing line can be used to manufacture 3.5 inch drives for
the Desktop segment and 1.0 inch drive for handheld PDAs (mobile vertical segment). Seagate
has maximized line utilization and been able to meet the widely varying unit demands through
this line flexibility. Seagate inventory management adds value to its relationship with customers,
especially large customers like OEMs and distributors.
Seagate maintains the real option of sourcing key read/write technology internally. Seagate
prefers backward integration of all key technologies. This flexibility reduces dependency on
technology suppliers. Technology advances such as perpendicular recording are examples of in-
house R&D, giving the firm at least a temporary competitive advantage. By developing its own
technology, the firm gives itself constant access to the required amount of raw materials to
14 The “cool factor” is a new technology or breakthrough that appeals to the company but may not necessarily be what the customer wants or needs.
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supply customers. Backward technology integration and access to adequate supply improve
availability value for Seagate.
Seagate provides customized solutions for strategic customers. It has been a leader in reducing
the storage footprint through improved areal density and smaller form factor. One key
performance metric for customers such as EMC is gigabytes per square foot for its data center
customers. Additionally, Seagate products are optimized across key customer metrics such as
shock resistance, form factor, and low power consumption.
Seagate R&D and manufacturing product features are eventually imitable by competitors.
Seagate has found ways to add additional value to the customer by being the first firm to offer a
5-year warranty for all Seagate products.
Seagate has linked its supply chain management system to both suppliers and customers to drive
down its own inventory costs and gain visibility into its customer demand patterns (Seagate
Technology, 2005). Seagate’s value chain is shown in Exhibit 18 and Figure 6 shows the strategy
map for Seagate.
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FinancialPerspective
CustomerPerspective
Learning and GrowthPerspective
InternalPerspective
Lower CostIncreased Market Share
Increased Shareholder Value
Net Profits
Customer
Satisfaction
Create Superior Value for
Customers
Work with partners to
deliver higher value
Price Quality Reliability AvailabilityScalability
Customer
Relationship
� Innovation� Create New
Products� All Products adopt
new technology
� Differentiation� Leader in Industry
� Focus on Branding
� OperationalEfficiencies
� Reuse same partsacross the products
� Reuse
Manufacturing linesfor different
products
� Supply ChainManagement
� Improve Supply
chain management� Optimize Inventory
Control
RetailManagement
Focused Work Force
� ManagementCulture
� Culture Focused oncost leadership
� R&D group focusedon innovation
� Competencies� Cost Focus
� Customer Focus� Flexibility to work
with partners
� Technology� Learning and
working on newtechnologies
� Developing andenhancing
technologies
Figure 6: Seagate Strategy Map
3.4.3.1 Complementarity
Seagate has complementing policies for two of its manufacturing and R&D facilities. The
manufacturing has a rigid management style with control from the top level. However, R&D is
managed differently. This works in great combination as the rigid management style enables the
company to be focused on the goal of reducing cost and the relaxed management style in the
R&D fosters innovation (Seagate 10K, 2005).
3.4.3.2 Consistency
Seagate’s cross business unit strategy and execution consistently adds value to reach and deliver
on the corporate strategy. Seagate’s R&D does not build products that increase the “cool factor”
but neglect what a customer actually values. R&D advances and service offerings such as across
the board warranty go together in delivering this value.
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3.4.3.3 Control and Coordination Systems
Seagate applies Six Sigma practices to improve product quality and reliability and drive down
cost. “Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects
in any process… The fundamental objective of the Six Sigma methodology is the
implementation of a measurement-based strategy that focuses on process improvement and
variation reduction through the application of Six Sigma improvement projects.”15 Applying Six
Sigma practices enforces standardized procedures and enhances coordination among the different
projects that Seagate engages in.
• Seagate is ISO 900016 certified. Key distribution and OEM customers require all of their
supplies to likewise be ISO 9000 certified. Seagate’s certification is another way of
delivering value and meeting regulatory requirements.17
• Seagate has improved coordination among suppliers and customers by integrating its
supply chain, reducing inventory and allowing suppliers to know when it is low on
inventory. Internally, Seagate uses a centralized top-down management hierarchy as the
coordination mechanism.
3.4.3.4 Compensation and Incentive Systems
Seagate uses a combination of firm-level and individual-level incentives as part of its
compensation package. The company provides employees with a competitive base pay in
addition to an incentive pay which rewards individual and company performance. Employees
also participate in the company’s success through company awarded stock options and employee
stock purchase plans. In addition, extra-ordinary employees are presented with awards ranging
from gifts to bonuses.
3.4.3.5 Organization, Culture, People and Learning:
Seagate has a culture and organization that fosters cost saving and technology innovation with
focus on the customers. This adds to its value and enables it to reduce cost. The manufacturing
processes require learning.
15 http://www.isixsigma.com/sixsigma/six_sigma.asp 16 http://www.iso.org/iso/en/iso9000-14000/index.html 17 http://www.iso.org/iso/en/aboutiso/introduction/index.html
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3.4.3.6 Framework
The VRIO analysis in Exhibit 19 shows the firm’s resources and capabilities. Seagate’s most
notable resources are its employees and its stringent and cost effective culture that provide the
firm with the skills necessary to build and maintain its capabilities of operational efficiencies.
The cost leadership is reflected in good financial strength (Exhibit 20) and operational
efficiencies (Exhibit 21). Figure 7 summarizes the different frameworks to show how Seagate
adds value to the customer and how it uses that value to retain customers.
Customer Benefits
Corporate� Customer Focus
� Cost Leadership
Operations� Reuse parts
� Efficiency� Low cost
� Inventorymgmt
CRM� Manage customer
relations
Positioning
� Products – meets allrequirements, mature
� Price – competitive� Place – present across the globe
� Promotion – n/a� Customer – first priority
� Company – focused on low cost� Competitor – few competitors
External
Effects
Lower cost New ProductsValue
MoreRevenue
Strategicmove to
consolidate
More revenue
Consolidation
SupplyChain Mgmt
Technology
� R & D� Customer focus
Figure 7: Seagate Value Creation Process
In conclusion, Seagate is focused on providing additional incremental value to its customers.
Since products and service differentiation moves are quickly imitated and commoditized,
Seagate has invested heavily in reducing its operational and raw material costs while delivering
visible end customer value. Seagate’s move from technical advancement to additional service
value and back are examples of its push to deliver value first. This consistent delivery
encapsulates Seagate’s strategy to retain customers and support its distribution channel margins.
3.5 Financial Analysis
Seagate has achieved higher ROE, ROA, and profitability than the industry, despite the fact that
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Seagate operates with a lower gross profit margin, Exhibit 20. Seagate has superior inventory
turnover and asset turnover, Exhibit 21. Seagate has a lower current and quick ratio than the
industry but declining debt to equity ratio and increasing current ratios shows that Seagate has
consistently improved its financial position.
Despite better operating ratios, Maxtor has been suffering from poorer profitability than Seagate
and the industry. Maxtor’s low and declining current and quick ratio indicate possible trouble
making payments and cash flows. Maxtor has a very high and increasing debt to equity ratio that
may also lead to solvency issues. Falling inventory turnover indicates large and increasing
inventories, a sign of operational issues.
Exhibit 24 shows Maxtor and Seagate’s stock performance against the S&P 500 Index. Maxtor’s
stock has significantly under-performed both the market and Seagate.
(NOTE: All DCF Exhibits are in Millions)
3.5.1 Maxtor Valuation
Maxtor’s trailing 5-year revenue numbers are shown in Exhibit 25. Maxtor’s revenue has been
erratic and actually declined during the last fiscal year. Because of Maxtor’s poor revenue
performance, the DCF analysis assumes Maxtor will only grow by 6.5% over the next four years
as opposed to the industry growth rate of 20.4% (Hoovers – Maxtor, 2006). The DCF analysis
reduces revenue to a 4% growth rate for two years and finally to the GDP growth rate of 3.75 %.
3.5.1.1 Maxtor DCF Valuation Analysis
The Maxtor DCF valuation is derived from key expenses as a percentage of revenue during the
last four year period, as shown in Exhibit 27. Based on this financial profile, Maxtor’s DCF
value is $2675.00 million. Exhibit 28 shows the change in Maxtor’s DCF valuation as the
growth rate over the next four years is changed.
3.5.1.2 Comparable Firm Valuations
Western Digital (WDC) and Imation (IMN) are comparable firms for valuing Maxtor. Other
major firms (Toshiba, Hitachi GST, and Fujitsu) are not listed in United States financial markets
and are conglomerates diversified in many other consumer electronic businesses. Exhibit 29
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details key comparable financial ratios. Maxtor’s value was $711.26 million based on the
comparables analysis. Note that the Adjusted Market Cap/Earnings and Stock Price/EPS are not
included since Maxtor has negative earnings. These comparable ratios are adjusted when applied
to the valuation in Exhibit 30.
Several historic comparable acquisitions were not useable in the valuation either because the
acquisition was of a private firm or because only a division of a company was acquired.
Financial numbers for these types of acquisitions are therefore not available. Some of the
comparable acquisitions considered were PMC Sierra’s acquisition of Agilent Storage, Maxtor’s
acquisition of Quantum, MiniScribe’s acquisition by Maxtor in 1990, Tandem’s acquisition by
Western Digital in 1988, IBM hard disk business’ acquisition by Hitachi in 2002, Digital
Equipment Corporation’s hard disk business acquisition by Quantum in 1994, Conner
Technologies’ merger with Excel Storage in 2001.
3.5.1.3 Summary of Maxtor Valuation
Based on the DCF valuation and comparable firm valuation the value of Maxtor is $1889.5
million as summarized in Exhibit 31. Public comparables are given only 40% weight because of
Maxtor’s negative earnings in the last year. This has severely impacted the firm ratios. The
acquisition makes the Maxtor firm more valuable now that it is in Seagate’s superior operational
framework and will therefore see improved future earning potential.
3.5.2 Valuation of Merged Seagate and Maxtor firms
The merged company saves $300 million in SG&A costs in the first year. The rate of cost
savings will be reduced yearly by 10% in subsequent years. The merged company is also
assumed to operate with Seagate’s COGS and achieve Seagate’s levels of operational efficiency
at an average for the last five years. The merged firm’s projected revenues and growth rate are
in Exhibit 32. From these revenue projections, firm growth rate is projected to be 9% for four
years after the acquisition and would taper to GDP growth of 3.75% when calculating the firm
terminal value.
The merged firm key cost percentages, in Exhibit 26, are based on the last four year Seagate
average of item as a percent of total revenues of Seagate as we believe that the company would
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keep its efficiency and improve the efficiency in the acquired units. The SG&A are estimated to
be the same as Seagate but we have factored in the savings of $300 M for the first year after the
acquisition and ongoing yearly savings that decrease by 10% yearly. Based on these
assumptions, the value of Seagate after the acquisition is $14,939.91M and a share price of
$25.94.
3.5.3 Scenario Analysis of the Merged Firm Performance
The value of the merged firm depends on many factors including the actual growth rate of the
firm and the realization of cost savings. The firm share value and NPV are shown in Exhibit 34
as the growth rate changes. Similarly, Seagate is predicting $300M in first year cost savings.
Exhibit 35 shows the firm valuation and share prices as the merged firm achieves different levels
of cost savings. In the base scenario, the value of the merged company is $14939.91M with 9%
growth rate and $300 million savings in the first year. The expected share price in such a
situation is expected to be $25.94. The sensitivity to changes in operational ratios using Tornado
is shown in Figure 8 and using Spider diagrams is shown in Figure 9.
3.00%
2.00%
4.00%
4.00%
7.00%
7.00%
65.00%
12.00%
5.50%
7.00%
20.00%
12.00%
15.00%
85.00%
-5000 0 5000 10000 15000 20000 25000 30000 35000 40000
% COGS
WACC
% R&D
Sales growth rate
% SG&A
GDP Growth
% D&A
Net Present Value
Figure 8: Merged Firm Tornado Diagram
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-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
70000
40% 60% 80% 100
%
120
%
140
%
160
%
% Change in Input Value
Ne
t P
res
en
t V
alu
e V
alu
e
Sales growth rate
% COGS
WACC
% SG&A
% R&D
% D&A
GDP Growth
Figure 9: Merged Firm Spider Diagram
Based on this sensitivity analysis, the merged valuation is most sensitive to COGS but less so to
SG&A expenses. Detailed calculation of synergies for the merged firm is discussed in Section
4.1.2.3.
3.5.4 Seagate without the Acquisition
As the industry leader, Seagate must evaluate if it would be better off without the acquisition of
Maxtor. Exhibit 36 shows the standalone entity projected Sales Growth rate, a four year trailing
CAGR of 11%. Based on key valuation parameters in Exhibit 26, the standalone valuation in
Exhibit 37 shows a NPV of $11493.11M and a share price of $23.84.
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4 ANALYSIS OF EFFECTIVENESS OF STRATEGY
4.1 Strategy Analysis and Summary
Seagate currently dominates the Desktop and Enterprise market segments and seeks to apply the
same leadership initiatives to the Mobile segment. The Mobile segment growth rates, as shown
in Exhibit 2, are exponential. The acquisition of Maxtor partially advances Seagate’s move into
the Mobile segment by consolidating its position in Desktop and Enterprise market segments.
4.1.1 Seagate Strategy Summary
The hard disk drive industry is a commodity market. Firms only manage temporary product
differentiation that is quickly imitated. Seagate has layered on service offerings, such as
warranty, to differentiate itself, but this too is imitable. Neither product differentiation nor
service offerings provide sustainable competitive advantage. In summary, Seagate’s strategy has
two main parts:
1. Seagate has been first to market with combinations of product technology advances and
service offerings and has therefore gained some first mover advantage.
2. Seagate has developed strong strategic customer relationships.
Seagate’s strategy has been to maintain strategic customer relationships to increase volume and
leverage its market size, utilize backward integration with suppliers to reduce cost, and
strengthen channel and technology partners by adding value.
4.1.2 Seagate Acquisition Benefit Summary
4.1.2.1 Seagate Current Market Position
Seagate strategic relationships with OEM vendors have allowed it to dominate in the Desktop
and Enterprise market segments. The main notebook market players such as Hitachi GST,
Toshiba, and Samsung are backward integrated with their own internally developed disk drive
units. Additionally, Samsung is backward integrated in the cell phone product segment. These
Japanese firms are strategically positioned in the mobile market segment with their backward
integration. The Japanese firms have a CR3 of 75% (Figure 3). Seagate only has strategic
relationships with notebook producers based in the United States and has no strategic
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relationship with the PDAs and cell phone producers. The Japanese firms also have a
geographical advantage. This explains Seagate’s low traction in Mobile market segment. To
succeed in the Mobile market segment, Seagate requires the following, increased strategic
relationships with the cell phone / PDA providers, manufacturing capabilities to provide the
required volume on time, and service and product that satisfy all the value drivers. These
weighted criteria are shown in Table 5.
Success Criteria Weights Reasoning Increased strategic relationship with the manufacturers of the mobile devices.
50%. Product differentiation is not a Sustainable Competitive Advantage. From the other market segments it is evident that strategic relationship is the key.
Capacity to provide the increase volume in products shipped
25% There is an increasing demand. Also, the vendors’ are competing in a competitive market. So shipment delays are unacceptable.
Value drivers required by this segment
25% This provides a temporary differentiating factor to enable obtain the first mover’s advantage.
Table 5: Seagate Mobile Segment Success Criteria and Weights
4.1.2.2 Seagate Acquisition goals
The acquisition of Maxtor provides Seagate the following advantages:
1. Eliminate a competitor in the disk drive industry and gain additional market share.
2. Gain access to Maxtor’s retail channel. Maxtor well developed retail channel expertise is
worth approximately $500M per year in revenue.
3. Gain media capacity through Maxtor’s wholly owned subsidiary, MMC.
4. Seagate manufacturing operations are operating at near capacity. Maxtor’s state-of-the-
art Maxtor plant China manufacturing plant is worth $300M. Seagate can use this facility
to manufacture and assemble additional Seagate drives.
5. Seagate gains award winning and innovative engineering talent.
From this acquisition, Seagate gains the capacity to meet the growing volume needs and the
resources and capabilities to provide the required value drivers in the mobile segment. Based on
Table 5 this is 50% of the required resources and capabilities to increase the market share in the
mobile market segment.
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From the Maxtor acquisition, Seagate is purchasing revenue (Merian, 2005). Seagate and
Maxtor enterprise and desktop drives almost completely overlay and therefore Seagate will
eventually end-of-life the Maxtor drives, as discussed in Section 3.4.1. Seagate is also acquiring
Maxtor customers.
4.1.2.3 Synergies
4.1.2.3.1 Value of Synergy
After the acquisition of Maxtor, Seagate is expected to create an additional value of $1.558
billion, which benefits both Maxtor and Seagate’s shareholders. Exhibit 38 shows the actual
share prices for both after the acquisition announcement. The increase reveals the positive
market sentiment towards the acquisition as both share prices increased. The acquisition
summary chart in Figure 10 below graphically shows the merger value.
Synergy1558
(=14940-11493-1889)
Goodwill
Premium
Book Value
1889
553Book Value of Equity
Market Value
Acquisition Price 1900
14940
Seagate’s Value
11493
Value of merged
Figure 10: Merged Firm Valuation and Synergy Summary
The merged firm’s improved future revenues are shown in Exhibit 39. Note the revenues
associated with merged firm synergies. The chart clearly indicates that the merged firm revenues
will be more then the sum of the two individual firms. The operating profits for the merged firm
will also improve, as shown in Exhibit 40. Operational savings in line items such as SG&A
costs improve the merged firm value. A huge increase in EPS is expected for Seagate after the
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acquisition, Exhibit 41. The new EPS will increase to $1.47 as compared to the current $0.52
(Yahoo Financials, 2006). The acquisition will be very accretive.
4.1.2.3.2 Synergy Sources
The sources of synergies are:
• Savings in Operations
• Savings in COGS (increased power over the suppliers)
• Research and Development
• Other (Increased market power, Depreciation & Amortization and Interest Expense)
Operations: The currently estimated savings from consolidating operations are $300 million a
year (Seagate/Maxtor, 2005). Shown in Table 6 are the DCF calculations without the savings on
consolidating operations.
Terminal Value 12109.2036
Present value of TV 6632.63528
Net Present Value 14169.6657
Terminal value percent 46.81%
Outstanding shares M 575.99
Share Value 24.6003362
Maxtor shares 254.04
conversion 0.37
maxtor shares in new 93.9948
Table 6: DCF Calculations for Merged Seagate & Maxtor
Value generated by consolidating operations is $771 million ($14940 – $14169, where $14940 is
NPV with all the synergies). Remainder of Synergy is $787 million (Total Synergy – Synergy
from operations = $1558 – $771)
Based on the Tornado Sensitivity Analysis chart shown in Figure 8, the percent variance caused
by COGS and R&D can be subdivided into individual synergies as follows:
• COGS (61.3% variance attributed)synergy = $ 482 M
• R&D synergy (3.8% variance attributed) = $ 30 M
• Other Synergies = $275 M
4.2 Maxtor Acquisition Challenges
1. Customer Retention: Seagate can retain Maxtor’s customers by developing strategic
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relationship with them and by honoring existing contracts and warranties. Seagate has a
proven track record for developing and maintaining key customer relationships.
2. Supplier Management: As Seagate consolidates Maxtor’s supply chain, it must
maintain a good relationship with suppliers. Seagate has successfully managed these
relationships in the past and should be able to continue to do so for this acquisition.
3. Human Resources: Retain key Maxtor engineers and retail channel management team.
Maintain morale of employees after a significant layoff. Seagate will shed large
overlapped staff in the Enterprise and Desktop segments. Maxtor employees who are
retained must jettison a bottom up culture and get focused on customer value drivers
instead of “cool factor” technology. Seagate HR must deliver adequate compensation
and technically satisfying to limit attrition. Seagate has integrated several firms such as
Conner so management is experienced with these challenges.
4. Brand Leverage: Seagate must leverage Maxtor’s retail presence to its advantage.
Seagate must retain the Maxtor OneTouch product line look and feel and transition the
underlying drive technology to Seagate technology. Seagate’s manufacturing expertise,
will help it make this manufacturing transition.
5. Information transfer (Retail Technology): Maxtor’s retail channel management team
must be absorbed as a whole entity into the Seagate reporting structure to preserve their
expertise and reduce attrition. Augmenting the team with Seagate employees and
building in Seagate structured processes over time will enable Seagate to absorb and
extend this key expertise from Maxtor.
4.3 Acquisition Risks
• By this acquisition, Seagate becomes a larger player in the market and as customers try to
diversify their supply risk, Seagate can lose market share. Also there is a potential for
Seagate to become a target for severe competition from the other smaller player.
• Due to layoffs at Maxtor, while optimizing the operations, there can be morale issues. If
these issues are not handled properly, it could cause attrition of skilled engineers and
channel managers (in the retail business unit). In that case Seagate would not be able to
leverage the full extent of synergies that they had expected.
• Manufacturing Risks: Seagate is planning on using the manufacturing lines of Maxtor.
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Due to unforeseen reasons if these lines cannot be used to develop Seagate’s products,
there would be a severe hit on the synergies (from operational efficiencies).
• Leverage Retail channel brand. One of the main goals of the acquisition is to leverage the
retail channel brand. If the marketing strategies are not executed well, Seagate could
potentially not leverage the retail channel brand of Maxtor.
• One of the goals of the acquisition is to increase revenue which can be diverted towards
R&D. The goal of R&D is to develop newer technology (PROBE) that would enable
them to compete with flash (substitute in the Mobile (handhelds) and Desktop (non-PC)
market segments). If they are unable to realize the required revenue this would affect
their research funds.
4.3.1 Failed Acquisition Scenario
In this scenario:
• There are no operational gains and Seagate is not able to save $300 million in the first year
• Seagate is not able to negotiate with Maxtor’s suppliers and manage inventories and the COGS is 78.7% rather than Seagate’s 75.5%
• The growth rate for the next four years remains 7% rather than the expected 9%
Table 7 shows the DCF valuation for this scenario. There will be a loss of value of $2,393
million and drop in share price to $15.80 for Seagate in this scenario.
Terminal Value 6955.60934Present value of TV 3809.83106Net Present Value 9100.39942Terminal value percent 41.86%Outstanding shares M 575.99Share Value 15.7994472 Maxtor shares 254.04conversion 0.37maxtor shares in new 93.9948
Table 7: DCF Valuation for Failed Acquisition Scenario
Table 8 and Table 9 show the scenario analysis for the failed acquisition scenario.
Revenue Growth 7% 4% 9% 11% 15% 20%
NPV $9,100 8438.40 9571.27 10066.78 11135.21 12625.258
Share Value 15.80 14.65 16.62 17.48 19.33 21.919049
Table 8: Scenario Analysis with Variation in Revenue
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SG&A Savings $0.00 $50 $100 $200 $300 $500 $0
NPV 9100.40 9228.77 9357.15 9613.90 9870.65 10384.143 9100.3994Share Value 15.80 16.02 16.25 16.69 17.14 18.028189 15.799447
Table 9: Scenario Analysis with Variation in SG&A Savings
4.4 Acquisition Highlights
• Timing of the execution: The industry is facing price war.18 One strategic response to a
price war is consolidation. Seagate is the number one player in two vertical segments,
constituting 70% of the industry overall volume. Seagate’s purchase of the number three
player in the same two vertical segments will reduce the price war.
• Choice of the firm: The choice of the firm is excellent. Fujitsu is the number two player
in the Enterprise segment and Western Digital is number two in the Desktop market.
Western Digital does not compete in Enterprise. The acquisition of a single firm that
competes in both segments gives Seagate leverage without having the additional cost of
trying to integrate two firms. Maxtor’s single focus on disk drives, unlike Fujitsu, keeps
the merged Seagate focused on its main business.
• Technical Economies: There are technical economies to be gained in this acquisition.
Maxtor’s weakness is in the operational aspects and Seagate’s strength in operations
augments Maxtor’s supply chain weakness. Maxtor’s strong retail brand value and retail
channel management augments Seagate’s brand weakness.
4.5 Other Effects of the Acquisition
Maxtor products will benefit from improved centralization and cost efficiencies under Seagate
management. Maxtor’s employees are likely to lose their jobs as Seagate management
eliminates product and operational overlap.
Maxtor’s read write head supplier, Komag, is going to see a dramatic loss of business as Seagate
converts Maxtor drives to use Seagate internally developed heads or eliminates the Maxtor
product all together. Large OEMs have signaled that they will mitigate supplier risk by shifting
some business away from the merged Seagate/Maxtor. Suppliers and buyers working with
18 http://biz.yahoo.com/ap/060307/data_storage_mover.html?.v=1
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multiple hard disk drive companies are likely to see little change in the overall market position.
4.6 Final Evaluation
The previous sections showed the positives from the acquisition, the synergies gained, passing
porter’s test and highlights of the move. The challenges and risks involved have also been
outlined. To determine if this will succeed the final analysis is done on the corporate vision and
resources to execute the acquisition.
Corporate Vision: Seagate’s acquisition of Maxtor is in line with its corporate strategy of being
the cost leader and customer visible product and service differentiation, strategic customer
relationships, and strong cross business unit synergy.
Resources & Capabilities: Exhibit 44 shows the integration plan. The following are the
resources and capabilities of Seagate:
o Expertise in the manufacturing (leverage savings from operations)
o Company culture (make the integration work)
o Supply chain management (leverage COGS synergy)
Summary: In summary, Seagate has all the necessary skills to successfully acquire, integrate
and leverage Maxtor to achieve its goals. The acquisition does not directly address growth in the
mobile market. The strategic move is to consolidate existing high volume markets (65% as of
2009,). From a consolidated position, Seagate can focus on higher revenue and profit dollars on
mobile R&D opportunities and service differentiation activities.
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5 RECOMMENDATIONS
Seagate’s acquisition of Maxtor will undoubtedly bring about changes in the hard disk drive
industry. Specifically for Seagate, this strategic move means an integration of Maxtor’s
operations to realize the economies of scale as well as any potential synergies that might exist.
Many changes will come out of this acquisition. Figure 11 shows the identified milestones that
Seagate must achieve for the success of the acquisition and the corresponding projected impact
on the value of the company (based on calculations) and the stock price. Below, we present
several recommendations that the merged company can use to achieve its goals from this
acquisition.
$0
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$4,000
$6,000
$8,000
$10,000
$12,000
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$16,000
$18,000
$20,000
2005 2006 2007 2008 2009 2010 2011
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ate
’s V
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Milestones
Retention of Talent
Employee Communication
Appoint Integration Leader
Legal Merger
Retail Channel Control
Customer Communication
Supplier Communication
Optimize workforce
Consolidate ERP, QA systems
Implement MIS
Replace Maxtor Brand
Normalize the product range
Seagate withoutAcquisition
Seagate withAcquisition
Stock Price withacquisition
Stock Pricewithout acquisition
Figure 11: Maxtor Integration Milestones and Corresponding Project Value & Stock Price
Short Term
In the first six months of the acquisition, the underlying goal for Seagate must be to manage the
acquisition, ensuring smooth processes and retention of key resources and capabilities from
Maxtor. The recommendations from this underlying goal are:
• Operations Consolidation: Because Seagate and Maxtor are in the same industry and
are direct competitors; many overlaps exist between the two companies. Bill Watkins,
president and CEO of Seagate believes that he “can run the combined company with
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about 25 percent more spending than I currently do at Seagate.”19 This consolidation
involves eliminating most of Maxtor’s employees as well as its executive team, as these
positions already exist at Seagate. However, Seagate can benefit from Maxtor’s
innovative engineering teams and Maxtor’s relationships/expertise in the retail channels.
The consolidation must not include the key engineering teams and retail channel
managers as this will reduce the effectiveness of the acquisition. Seagate and Maxtor’s
capabilities in manufacturing can generate tremendous economies of scale for the
combined company. Seagate must start immediately implementing its excellent
manufacturing practices at Maxtor’s facilities including the state-of-the-art manufacturing
facility in China. These manufacturing facilities must be “retooled” to manufacture the
consolidate product portfolio of the new Seagate organization.
• Product Portfolio Consolidation: Since Seagate and Maxtor directly compete against
each other in the Enterprise and the Desktop market segment, there is a significant
product overlap in the product portfolio as shown in Exhibit 13. Thorough analyses of
the different product families must be conducted to eliminate overlapping products. It is
most likely for Seagate to end-of-life Maxtor’s products and replaces it with Seagate
products. Maxtor’s personal storage retail products, the OneTouch, have no
corresponding product at Seagate and should be preserved by the merged firm. However,
Seagate must honor any existing Maxtor contracts, particularly those in the Enterprise
market segment. Seagate should work closely with Maxtor’s customers to help them
transition to Seagate new product lines.
• Leverage Retail Channels: Maxtor’s success in the retail channels is a key capability
that Seagate lacks. Seagate must leverage this capability to grow stronger in the retail
market segment. For the retail channels, Seagate must retain Maxtor’s branding but
immediately add Seagate’s branding to Maxtor’s products.20 This allows the retail
channels to associate Maxtor’s brand value with Seagate and allow building its brand in
this segment. Establishing the Seagate brand will also enable it to introduce its own
products to this channel.
• Manage Maxtor’s Customers, Suppliers and Partners: The result of this acquisition
19 http://www.techworld.com/storage/features/index.cfm?featureid=2113&Page=1&pagePos=20&inkc=0 20 http://www.seagate.com/branding
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could give Seagate a 42.4% market share in the hard disk drive industry. Analysts
believe the OEMs will rebalance their supplier portfolio to avoid excess reliance on a
single supplier. However, if Maxtor’s customers, suppliers, or partners cut their
relationship with Seagate after the acquisition, Seagate loses the potential market share
gained from Maxtor. Seagate must retain as much of Maxtor’s market share as possible.
An important factor during the consolidation is to maintain communication with
Maxtor’s customers, suppliers, and partners to keep them up-to-date with the changes
happening and how the changes affect them. This allows them to feel part of the process
and less likely to switch to a competitor. Special promotions can also be done to retain
Maxtor’s customers and partners.
• Evaluate Future Potential Acquisitions: Although relatively strong in the desktop and
enterprise market segments, Seagate is not as big in the mobile segment; this market
segment presents the larges future opportunity for this industry. To expand quickly in
mobile and consumer electronics, Seagate must continue on its path of acquiring other
companies, particularly companies with a strong presence in the mobile market.
Long Term
After the first six months of the acquisition, Seagate will most likely still be in the process of
implementing some of the short-term recommendations mentioned above but it must also
concentrate on the long-term goals of the acquisition. By now the synergies of the combined
company must be apparent. Long term recommendations for Seagate include:
• Increase Seagate’s Brand Awareness: Seagate’s brand awareness is strong in the
desktop and enterprise segments but in the mobile and retail segments, its brand value is
not as high as Maxtor. With hard drives being a commoditized product, Seagate must use
the value of its brand to differentiate itself from competitors. To achieve this
differentiation, Seagate must engage in a new marketing campaign to increase its brand
awareness such that Seagate is automatically associated with hard drives (the same way
Intel is associated with Microprocessors through the “Intel Inside” campaign). Increased
brand awareness will also enable Seagate to expand in the consumer electronics market.
• Expand Mobile Market Share: To maintain its leadership in the hard drive industry,
Seagate must grow with the market. The strongest growth in this industry is expected
from the consumer electronics segment. Value drivers in this segment include form
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factor, shock tolerance and power consumption because of the nature of the applications.
Seagate is currently lagging behind other competitors in terms of market share due to
forward and backward integration of competitors. However, increased market shared
from desktop and enterprise segments as a result of this acquisition means more revenue,
allowing more investment in R&D, which can be used towards innovation and staying
ahead of its competitors. Another option is to acquire a competitor such as Cornice.
Cornice is a small, privately owned company with presence only in the mobile segment
and strong potential for growth. It recently partnered with some of Seagate’s competitors
to develop hard drives for consumer electronics applications. Acquiring Cornice allows
Seagate to quickly gain the technology needed for the mobile market, allowing it to
increase market share in this area.
• Enter the Flash Market: Currently, Flash drives are more popular than hard disk drives
for low end applications, but in the long run hard disks are expected to outlive Flash
drives. But until then, Seagate must take advantage of the market trend and capitalize on
flash drives. Flash drives are a strong substitute for hard disk drives, particularly for low-
end applications, Seagate must either enter the Flash market or partner with a company
already providing Flash-based products (Window Strategy). If it chooses to enter
independently, Seagate will have to climb the technology curve for Flash devices very
rapidly. It does not have any previous expertise developing Flash-based products.
Partnering on the other hand enables it to benefit from existing learning and
manufacturing expertise and enable it to get to market faster.
• Strategic Partnerships: Being in a commoditized industry, it is difficult for Seagate to
add and maintain additional value for customers through product differentiation.
However, Seagate must have some way of differentiating itself from competitors
otherwise customers become indifferent and can easily switch from Seagate to other
competitors. A way to do this is by forming strategic partnerships with customers such as
cell phone and PDA manufacturers, where Seagate supplies customized hard-disk drives
for mobile applications.
• Provide Additional Value by Entering Adjoining Businesses: With hard disk drives
becoming commoditized products, Seagate must expand into other business areas where
it can utilize its core competency. Creating a new business unit around hosted storage
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allows it to stay within the storage business yet at the same time to provide additional
value for customers. Seagate could potentially become a one-stop shop for customers’
storage needs.
5.1 Strategy Implementation
Seagate’s ability to leverage Maxtor’s brand value in the retail channels and increase brand
awareness are short-term and long-term recommendations that can greatly affect the outcome of
Seagate’s acquisition of Maxtor. In addition, building strategic partnerships is a
recommendation that needs to start immediately and extend into future years. Successful
execution of these recommendations will strengthen the company’s growth and also help the
other recommendations fall into place.
The acquisition process will involve some major cost cutting, including layoffs of Maxtor
employees. However, Maxtor’s retail channel team must be kept intact if Seagate is to obtain the
benefits of Maxtor’s brand. Incentives, such as bonus and additional stock options, must be
offered to key employees over a period of time so that they are willing to stay after the
acquisition. If key employees in the retail channel team leave, Seagate loses Maxtor’s
capabilities and the possibility of leveraging Maxtor’s brand decreases. Maxtor itself does not
have any capabilities, but rather it is its employees that build the company’s capabilities. An
initial step is to incorporate Maxtor’s retail management team with Seagate’s. It is important to
appoint an integration leader that is highly respected in Maxtor in order to obtain buy-in from the
employees that are retained by Seagate.
In addition, the acquisition can be communicated to customers and the market by adding the
Seagate logo to Maxtor’s products. This is a subtle change that will inform customers that
Maxtor is now Seagate but at the same time, the Maxtor brand value remains unchanged. This
falls in line with Seagate’s brand standard of maintaining consistency. In the long run, Seagate
can increase its brand awareness in all segments by engaging in a new marketing campaign.
This campaign must seek to inform the market that Seagate storage products are preferred over
other competitors with examples of what the company is doing to obtain this differentiation.
Seagate can draw on its awards in quality manufacturing as well as Maxtor’s awards in product
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innovation to show that the value of its products is better.
Seagate has been able to maintain its market leadership over a period of time and can further
improve its position by forming strategic partnerships with OEM vendors, suppliers, distributors,
and customers. Strategic relationships can increase product volume with customers, reduce costs
with suppliers, and add value to partners. Although competitors can also develop this
relationship with vendors, Seagate’s customer focus culture enables it to stay ahead of the curve
using these strategic relationships.
Following through on these recommendations allows Seagate to maintain its leadership in hard
disk drives and expand in the mobile market segment.
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6 CONCLUSION
Seagate dominates the hard disk drive industry as the leader in the large Desktop and Enterprise
segments. Seagate’s acquisition of Maxtor consolidates this market dominance and puts Seagate
in position to capture the mobile industry segment. Future efforts to increase its brand awareness
and build on Maxtor successes in the retail channel are two keys to gaining traction in the mobile
segment. Based on Seagate’s ability to drive down cost through cross product line supply chain
management and differentiating R&D, the conclusion of this paper is that Seagate will be able to
take market share at an increasing rate over time. The stock traded at $24.28 on March 10, 2006.
The post merger valuation shows the merged firm to be valued at $25.94 (from Exhibit 33).
Therefore, the stock is undervalued and should be purchased for the long term.
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8 APPENDICES
EXHIBIT 1 Level 1 & Level 2 Analysis
1. Supplier Power
1.1. Read-Write Head Technology
Factors underlying Supplier Power
Score/ Rank
Notes
Concentration Ratio for each Supplier Group
4/6 There are 4 suppliers of heads: Komag, TDK/SAE and Alps provide read-write heads to the industry. The concentration ratio is high.
Supplier Industry Growth Rate 1/9 The growth rate in the supplier industry is directly tied to the growth rate of disk drive industry.
Strategic Importance of Firms to the Suppliers
1/3 Read-write heads are specialized components only used in hard-disk drives making the suppliers very dependent on the hard disk drive manufacturers.
Strategic Importance of Suppliers to the Firms
1/4 Most of the existing disk drive firms have backward integrated and manufacture their own read-write heads. Suppliers deliver a small fraction of the total volume of read-write heads consumed by the industry reducing their importance to the firms.
% volume sold to the firm 1/1 A very small percentage of the overall industry volume is delivered by external suppliers.
Are the Supplier Group’s products/services differentiated?
2/5 The read-write heads are not differentiated. However, there is some differentiation based on tolerances.
Are there substitutes for the Supplier Group’s products/services?
4/8 Read-write heads are an essential component of disk drives and there are no substitutes for the supplier group’s products/services.
Do the Suppliers earn low profits? 4/7 Market prices for disk drives are continuously falling resulting in lower margins for component suppliers.
Do the Suppliers pose a forward integration threat?
2/2 Suppliers do pose a small threat of forward integration. Komag is already forward integrated and manufactures hard drives.
Conclusion (Level 2 Analysis)
1. Read-write heads are a critical component of hard disk drives. The head technology is also particularly important for adopting newer technologies that increase the areal density. Most of the hard disk drive manufacturers have backward integrated to produce their own Read-write heads. The percentage volume delivered by suppliers is such a very small portion (<10%) of the total volume used by the industry. This drastically reduces supplier power (this
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factor has the highest weight for Level 2 Analysis). This low supplier power makes this factor Very Favorable to the industry.
1.2. Recording Media
Factors underlying Supplier Power
Score/Rank
Notes
Concentration Ratio for each Supplier Group
4/6 There are 4 suppliers providing recording media: Komag, Alps and TDK/SAE. The concentration ratio is high.
Supplier Industry Growth Rate
1/9 The growth rate for the suppliers is directly tied to that of the hard disk drive industry.
Strategic Importance of Firms to the Suppliers
1/2 Recording media are an important component of hard disk drives and suppliers depend on hard disk drive manufacturers to consume all the produced media.
Strategic Importance of Suppliers to the Firms
1/3 Most of the existing hard disk drive manufacturers are backward integrated and use suppliers as an alternate source. Suppliers deliver a very small percentage of the volume used by the hard disk drive manufacturers.
% volume sold to the firm
1/1 Hard disk drive manufacturers use suppliers as an alternate source to deal with unexpected variances in demand. On average 30% of the volume is delivered by suppliers (the exact percentage of volume varies each quarter). The firms themselves manufacture the remainder.
Are the Supplier Group’s products/services differentiated?
1/4 Recording Media are not differentiated across different suppliers.
Are there substitutes for the Supplier Group’s products/services?
4/5 Recording Media are an essential component of the hard disk drives and there are no substitutes for the supplier group’s products/services.
Do the Suppliers earn low profits?
4/8 Market prices for disk drives are continuously falling resulting in lower margins for all component suppliers.
Do the Suppliers pose a forward integration threat?
2/7 Suppliers do pose a small threat of forward integration. Komag is already forward integrated and manufactures hard drives.
Conclusion (Level 2 Analysis)
1. The recording media is the physical medium on which information is stored in hard disk drives. It consists of aluminum and glass substrates. Disk drive manufacturers are backward integrated and only buy 30% of the total industry volume from external suppliers. Suppliers are used to mitigate the risk for varying demand and total reliance on their internal supplier. This lack of power for the external supplier makes it Very Favorable to the industry.
1.3. Other suppliers
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Other components provided by suppliers include the spindle motors, ASICs and Printed Circuit
Boards. Firm backward integration and low percentage of the total volume provided by
suppliers, discussed for recording media supplier groups, also apply to these suppliers. These
two factors reduce supplier bargaining power with the hard disk drive firms. This lack of supplier
power is Very Favorable to the industry.
1.4. Conclusion for Supplier Power
The overall conclusion for the supplier power is 1 (Very Favorable to the industry).
2. Threat of Rivalry
Factors underlying Rivalry
Score/Rank
Notes
Competitors are numerous or roughly equal in size.
1/7
The industry is dominated by a few large players with a high concentration ratio.
Industry Growth is slow 1/6
The hard disk drive industry grew by 35% over the last year and is expected to grow by another 60% over the next 3 years. The bulk of this increase in demand is expected in non-PC desktop computing and mobile computing segments.
High fixed or storage costs 4/5
The high fixed costs required to set up a manufacturing line encourage firms to run their lines at capacity. Firms are therefore more willing to cut prices to keep their lines full.
The product or service lacks differentiation or switching costs
5/1
Hard disk drives lack product differentiation. The differentiation is based on brand, price and product quality.
Capacity is normally augmented in large increments
4/4 Hard disk drive manufacturing lines are designed with large capacity.
Competitors are diverse in strategies, origins, “personalities”, and relationships to their parent companies
4/3 The market segment that they compete in determines firm’s strategies. Pricing and operational efficiencies are critical factors leading to similar strategies across the industry. The Japanese firms (Hitachi, Toshiba and Fujitsu) are captive manufacturers with different strategies from the other manufacturers.
High strategic stakes 4/2 Hard disk manufacturing is the primary business for Seagate, Maxtor, Western Digital and Cornice and they have a very high strategic stake in this industry. On the other hand the other manufacturers who are vertically integrated have significant financial resources to engage in price competition in the industry.
Exit Barriers are High 2/8 Exit barriers are low and this has resulted in significant consolidation in the industry.
Conclusion 4. Rivalry in this industry is extremely fierce. In the desktop segment, price wars
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(Level 2 Analysis)
are intense. The lack of product differentiation further exacerbates the price competition. For many of the firms the hard disk drive industry is their primary market increasing their stakes in the industry and further fueling intense rivalry. These factors make the industry Moderately Unfavorable.
Exit Barriers
Low High
Low Entry Barriers High Required high economies of
scale/scope to make profit.
3. Barriers to Entry
Factors underlying Potential Entrants
Score/Rank
Notes
Economies of Scale
1/3 There are high economies of scale in this industry.
Product Differentiation
2/2 The product is not differentiated in the industry.
Capital Requirements 3/8 Capital requirements exist but are not significant to enter this market.
Access to Distribution Channels
2/5 OEMs (DELL, HP, etc) are the main buyers in this industry. With minimal differentiation in the product and low switching costs, brand is an important factor in this segment making access to distribution channels more difficult for a new entrant.
Cost disadvantages independent of scale
1/4 The ability to manufacture a disk drive is a “black art” requirement significant investment in R&D. Operational efficiencies result from learning. Learning also forms a basis for future innovation.
Government Policy 2/7 Government policies exist regarding protection and encryption of data. In addition environmental regulations requiring disk drives makers to design technology that provides for a means of proper disposal of disk drive media. This places added burden on any new entrant.
Expected Retaliation 1/1 Due to the high concentration ratio and high stakes in the industry retaliation from the incumbents will be high.
The Entry Deterring price
2/6 Price competition in some of the market segments is very high. This is disadvantageous for new entrants.
Conclusion (Level 2 Analysis)
2. Economies of scale and learning play a major role in determining profitability for this industry. However capital required for entering the industry are not significantly high and the technology can be acquired at a relatively lower cost. Historically, this industry has been extremely susceptible to disruptive technology. This makes the Barriers to Entry Moderately High in favor of the industry.
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4. Buyer Power
4.1. Mobile Computing Segment (Laptop Computers, Mobile Phones & PDAs)
Score/Rank
Notes
Factors Underlying Buyers’ Price Sensitivity Is the product differentiated?
2/3 The product is differentiated on form factor, shock tolerance and power consumption.
Does the buyer earn low profits?
2/12 The laptop computer manufacturers earn low profits making them price sensitive. On the other hand cell phones and PDA manufacturer have much higher margins and are less price sensitive. There are moderate price pressures transferred to the firms.
Is the product strategically important to the buyer?
1/2 Yes. The current substitute, Flash-based storage, is expensive. Having more hard disk space increases the attractiveness of the end product.
Is the product a significant portion of buyer’s costs?
3/9 Disk drives constitute about 15% of the cost of laptop computers.
Value driver (product quality/form factor/ low power consumption)
1/1 This provides the firms additional bargaining power as the buyers’ can now provide more value to their end customer.
Factors Underlying Buyers’ Bargaining Power Concentration ratio for each buyer group.
1/6 Distributors/retailers have a low concentration ratio. No single OEM contributes more than 10% of revenue for the firms.
Is the buyer strategically important to the firms?
2/5 No single buyer constitutes a major percentage of volume sold. There are strategic partnerships between some of the firms and the buyers.
Are there buyer switching costs?
4/7 There is minimal switching cost. Switching costs may be in the form of any contractual expenses and additional testing on the OEM side.
Does the buyer have full information?
4/11 Full information is not a significant factor in this industry.
Does a threat of backward vertical integration exist?
3/10 Japanese firms (Fujitsu, Toshiba and Hitachi) are backward integrated but the threat of other manufacturers backward integrating is low. HP and IBM, for example, used to manufacture hard disk drives but have since exited the industry to focus on computer manufacturing.
% Volume sold to the buyer
1/8 No single buyer commands a very high percentage of the volume sold in the industry.
Value provided (form factor/ low power consumption)
1/4 This is very critical for the buyers. Improved form factor along with lower power consumption enables buyers to offer differentiated services to their customers.
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Conclusion (Level 2 Analysis)
1. The mobile computing segment is the fastest growing market segment. The segment saw a year-over-year growth of 342% (from Gartner) in Q4’05. Disk drives are becoming an enabler for the cell phone and PDA industry to development new applications and services for consumers. All these factors make it Highly Favorable to the industry.
4.2. Desktop Computing Segment (PC and non-PC)
Score/Rank
Notes
Factors Underlying Buyers’ Price Sensitivity Is the product differentiated? 5/3 Disk drives for desktop computing are a commodity
and the products are not differentiated.
Does the buyer earn low profits?
5/2 The buyers earn extremely low profits as this market is extremely price sensitive.
Is the product strategically important to the buyer?
2/5 Hard disk drives are an integral part of the product but are not the differentiating factor for the buyer’s customers.
Is the product a significant portion of buyer’s costs?
2/8 No. Hard disk drives constitute a small percentage of the total cost of a PC and non-PC desktop applications.
Factors Underlying Buyers’ Bargaining Power Concentration ratio for each buyer group
2/9 There is a low concentration ratio in the PC (OEM vendors) and the non-PC market segments.
Is the buyer strategically important to the firms?
2/7 No one firm consumes a large percentage of sales from the industry.
Are there buyer switching costs?
5/1 There are minimal switching costs enabling the buyers to switch between the firms. This increases buyer bargaining power.
Does the buyer have full information?
4/10 The buyer has full information regarding the product’s seek time, data transfer rate, and interface transfer rate. Full information enables the buyer to compare different products and determine put a price to the value provided by each factor.
Does a threat of backward vertical integration exist?
2/6 There is no threat from the OEM vendors (example, DELL) to backward integrate in the PC market segment. The same is the case in the non-PC market segment. However there are some firms (Toshiba, Hitachi and Fujitsu) in the desktop market segment that are backward integrated.
% Volume sold to the buyer 2/4 No one buyer consumes a large percentage of sales.
Conclusion (Level 2 Analysis)
4. The Desktop segment consists of PC and non-PC segment. The non-PC segment is seeing rapid growth and is less price sensitive compared to the PC segment. In the desktop segment there is intense price competition fueled by low switching costs and lack of product differentiation. This is Moderately Unfavorable to the industry.
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4.3. Enterprise Computing Segment
Score/Rank
Notes
Factors Underlying Buyers’ Price Sensitivity Is the product differentiated? 2/3 Product is differentiated on Quality & Reliability
Does the buyer earn low profits?
2/10 No. Profit margins are significant making the buyer less price sensitive.
Is the product strategically important to the buyer?
2/4 Due to increased demand for data archiving and data reliability, the product is strategically important to the buyer.
Is the product a significant portion of buyer’s costs?
4/7 Yes. Data storage requirements are ever increasing in the enterprise computing segment. The average quantity of data stored by large firms is on the order of several Terabytes.21 This storage capacity is a significant portion of the buyer’s costs.
Value Driver (Product Quality/Reliability)
1/1 The primary value drivers for the enterprise market segment are product quality and reliability.
Factors Underlying Buyers’ Bargaining Power Concentration ratio for each buyer group
4/9 There are primarily 3 OEMs (HP, Dell and IBM) consuming the majority of hard disk drives in the enterprise market segment.
Is the buyer strategically important to the firms?
2/6 The enterprise market constitutes only 10% of total revenue in the disk drive industry. No single buyer is strategically important to the firm.
Are there buyer switching costs?
2/5 The buyers go through a selection process for qualifying hard disk drives for their high end products. Buyers are unlikely to switch manufacturers after qualifying a hard disk drive.
Does the buyer have full information?
4/12 The buyer has full information regarding the product’s seek time, data transfer rate, and interface transfer rate. These factors enable the buyer to compare the different products to determine the value provided as a factor of price.
Does a threat of backward vertical integration exist?
2/11 There is no threat of backward integration from OEMs such as HP, Dell and IBM. HP and IBM have both exited this industry.
% Volume sold to the buyer 1/8 No one buyer consumes a significant percentage of the volume sold in this industry.
Product Quality/Reliability 1/2 The primary value driver for the enterprise market segment is product quality and reliability.
Conclusion 2. The enterprise market is not price sensitive and places higher value on
21 1 Terabyte = 1000 Gigabyte = 1,000,000,000,000 bytes
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(Level 2 Analysis)
product quality and reliability. The enterprise market segment requires larger and larger capacity hard disk drives. These factors make industry conditions Moderately Favorable.
4.4. Conclusion
Score Weights Weighted Score Mobile 1 40% 0.4
Desktop 4 30% 1.2 Enterprise 2 30% 0.6 Total Score 2.2
Table 10: Buyer Power Summary
Table 10 shows the final score for the buyer power as 2. The Mobile Computing market segment
is given a slightly higher weight in this analysis due to its rapid growth rate, the other two market
segments, Desktop and Enterprise, are weighted equally.
5. Threat of Substitutes
At the high end, the hard disk industry does not have any substitutes, however historically the
industry has been extremely susceptible to disruptive innovation starting at the low end of the
market (Christensen, 2000). For the purpose of analyzing substitutes, the disk drive market can
be divided into the Mobile application segment and Non-mobile application segment.
• Mobile application: This segment includes notebook computers, Cell Phones & PDAs.
For this segment of the industry, Flash-based drives, which have a much smaller form-
factor, similar read-write performance characteristics as hard drives and no moving parts,
are a Strong Substitute for hard drives. This is clearly evidenced with Apple converting
the low-end of their popular iPod music player (iPod nano22 and iPod shuffle23) to use
Flash drives and Samsung planning to introduce a Flash-based Laptop computer.
• Non-Mobile application: This segment includes the Enterprise, Desktop PC and the non-
desktop PC (set-top boxes, Digital Video Recorders, etc). Data storage is used in two
forms: real-time data access where data is read instantaneously from the storage disk and
the archive data storage and retrieval.
o For the real-time data access there are No Substitutes currently available in the
22 Apple – iPod nano – Technical Specifications (http://www.apple.com/ipodnano/specs.html) 23 Apple – iPod shuffle – Technical Specifications (http://www.apple.com/ipodshuffle/specs.html)
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industry. However with continued investment in R&D for flash-based drives
resulting in higher capacity and reduced prices Flash-based drives could become
strong substitutes in the near future. Samsung plans to introduce “hybrid” drives
which combine the benefit of conventional disk drives and Flash-based storage
into a single disk (Bray, 2005) later this year. In addition, other technologies such
as holographic storage (Ashley, et. al., 2000) and nano-mechanical data storage
technologies24 currently under research could become substitutes for the
conventional hard disk drives.
o For data archiving, where data does not need to be accessible all the time, optical
drives, tape drives and films are Moderate Substitutes for the hard drive
industry. At the high-end (enterprise applications) tape drives offer a better
storage capacity per dollar than that offered by hard disk drive. Similarly writable
optical media such as CD-RW or DVD-RW offer better storage capacity per
dollar for desktop market segment.
Market Segment Score Weight Weighted Score Mobile Notebooks 3 20% 0.6
Mobile Cell Phone PDA 4 25% 1.0
PC Desktop 1 15% 0.15
Enterprise (Real-time access) 1 15% 0.15
Enterprise Archiving 4 10% 0.4
Non-PC Desktop 1 15% 0.15
Total Score 2.45
Table 11: Threat of Substitutes Summary
Table 11 shows the summary of the substitutes for the disk drive industry. The Mobile
Notebooks and Mobile Cell Phone/PDA segments have been given a higher weight because
strong substitutes exist and they also represent the fastest growing market segments. This factor
is moderately favorable to the industry with a rating of 2.
6. Role of Complementors
There are no supply side complementors for the disk drive industry. On the demand side the
demand for disk drives has increased significantly in the last few years with the use of disk
drives in consumer applications such as Digital Video Recorders (DVR), high mega-pixel Digital
24 The "millipede" project. http://www.zurich.ibm.com/st/storage/millipede.html#
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Cameras and Digital Video Cameras. Consumer demand for content in the digital format is a
strong complementor driving sales of the higher capacity disk drives. For example, an increase
in number of digital photographs will result in increase need for storage technology for archiving
and storing these digital photographs. Similarly, in the mobile market new applications are
driving the need for higher capacity disk drives. A majority of the value is commanded by the
applications but the applications only become feasible with the appropriate storage capacity.
New software applications, requiring additional data storage increase demand for higher capacity
storage devices, are also complementors to the disk drive industry. However, the hard disk drive
industry does not exert any power over the software application industry. The presence of weak
complementors makes this is Neutral factor for the industry; hence a rating of 3.
EXHIBIT 2 Product Positioning
Market
Segment
Product
Segment
Strategic
group
(Value
drivers)
Inch
drive
Substitutes % of
units
shipped
(2005)
Growth
% (in
units)
for next
3 years
% of
units
shipped
in 3
years
Notebooks
(Personal
Computing)
Price
sensitive
Group
2.5 None 22% 20% 29%
Cell phones/
PDA
(Consumer
Electronics)
Form Factor
Group
1.0, 1.8 Flash 8% 533% 15%
Desktop PCs
(Personal
Computing)
Price
Sensitive
group
2.5, 3.5 None 49% 29% 37%
DVR,
Gaming,
MP3 players
(Consumer
Electronics)
Form Factor
group and
Quality and
Reliability
group
2.5, 3.5 Flash 13% 62% 13%
Constant
Data retrieval
Quality &
Reliability
group
3.5 Tape drive
Data
Archiving
(Retrieved
very
infrequently)
Quality &
Reliability
group
3.5 Tape drive,
optical
drives and
films.
Enterprise
Computing
8% 33% 6%
Mobile
Computing
Desktop
Computing
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EXHIBIT 3 Dollars per MB of Solid State v/s Hard Disk Drive
Source: http://www.storagesearch.com/semico-art1.html
EXHIBIT 4 Value Drivers
Value Driver Seagate Maxtor Western
Digital
Hitachi
GST
Samsung Toshiba Fujitsu Cornice
Physical size x n/a x x
Storage
capacity
x x x x x x x
Plug & Play
compatibility
x x x
Low power
consumption
x x x x
Shock tolerance x x x x x x
n/a n/a n/a
Storage
capacity
x x x x x
Breadth of
product lines
x x x x x
Quality x x x x
Reliability x x x x
n/a n/a n/a
Storage
capacity
x x x x x
Performance
(seek time)
x x x x
Breadth of
product lines
x x x x
Quality x x x x
Reliability x x x x
Customization
& integration
x
Power/operatin
g temperature
x x x x
Mobile Segment
Desktop Segment
Enterprise Segment
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EXHIBIT 5 Willingness to Pay calculations (ASP Method)
Hardware Platform Weekly 12/05/05
Source: Gartner Dataquest (Quarterly HDD Revenue and ASP Changes)
3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05
ASP 80.7 82.1 79.2 76.1 72.4 73.0 74.8 69.3 72.7
Average ASP 4 79.1 76.7 75.5 75.3 74.1
% Change in ASP 8.51% 4.83% 0.89% 7.91% 1.87%Average % Decline in
ASP per year 4.80%
Mobile
ASP
Desktop
ASP
Enterprise
ASP
Mobile
ASP
Desktop
ASP
Enterprise
ASP COGS
Total # of
Units
Shipped
Cost
Per
Unit
Seagate 74.4 55.8 184.8 70.8 53.1 175.9 6,393.0 107,896.00 59.3
Western Digital 70.0 59.9 0.0 66.6 57.0 - 3,459.3 66,636.00 51.9
Maxtor 0.0 65.5 173.2 - 62.3 164.9 3,254.2 58,423.00 55.7
HGST 88.1 76.0 157.3 83.9 72.4 149.7 -
Samsung 73.6 54.6 0.0 70.0 52.0 - -
Toshiba 87.2 0.0 0.0 83.0 - - -
Fujitsu 88.2 0.0 161.8 83.9 - 154.1 -
Excelstor 0.0 44.3 0.0 - 42.1 - -
Cornice 59.8 0.0 0.0 56.9 - - -
RioSpring/GS-MagicStor 79.7 0.0 0.0 75.9 - - -
Total Units 85.9 60.2 173.9 81.8 57.3 165.6
2004 2005
EXHIBIT 6 Willingness to Pay calculations (Revenue Method)
Mobile Units
shipped
% share in
volume
% revenue (%
share * Product
factor)
% revenue
mapped to
100%
Revenue ASP
Seagate 15,998.00 14.1 12.21 12.43% 1179.79 73.75
WesternDigital 3419.00 3.00 2.44 2.49% 236.17 69.07
HitachiGST 35635.00 31.40 32.19 32.78% 3111.09 87.30
Samsung 5803.80 5.10 4.37 4.45% 421.97 72.71
Toshiba 32095.00 28.30 28.72 29.25% 2775.97 86.49
Fujitsu 18804.50 16.60 17.03 17.34% 1646.00 87.53
Cornice 1214.00 1.10 0.77 0.78% 73.99 60.95
RioSpring/GSMagicStor 538.00 0.50 0.46 0.47% 44.84 83.34
Total 113507.30 100.00 98.19 100.00% 9489.82 83.61
Desktop Units
shipped
% share in
volume
% revenue (%
share * Product
factor)
% revenue
mapped to
100%
Revenue ASP
Seagate 78136.00 32.50 30.12 30.11% 4239.57 $54.26
WesternDigital 63217.00 26.30 26.17 26.15% 3682.90 $58.26
Maxtor 49539.70 20.60 22.40 22.39% 3152.64 $63.64
HitachiGST 19375.00 8.10 10.23 10.22% 1439.32 $74.29
Samsung 27070.80 11.30 10.25 10.25% 1442.65 $53.29
Excelstor 2978.00 1.20 0.88 0.88% 124.10 $41.67
Total 240316.50 100.00 100.05 100.00% 14081.18 $58.59
Enterprise Units
shipped
% share in
volume
% revenue (%
share * Product
factor)
% revenue
mapped to
100%
Revenue ASP
Seagate 13,762.00 52.6 55.89 55.58% 2461.63 178.87
Maxtor 3,608.30 13.8 13.74 13.67% 605.38 167.78
HitachiGST 3,413.00 13 11.75 11.69% 517.71 151.69
Fujitsu 5,392.90 20.6 19.17 19.06% 844.29 156.56
Total 26,176.20 100 100.56 100.00% 4429.01 169.20
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EXHIBIT 7 Cost Calculation
A B C D E F
1 Cost calculations for Seagate
2 dec 30'05 sep 30 ' 05 June 30 '05 March 31 '05
3 4Q 3Q 2Q 1Q
4 Revenue 2300 2088 2179 1969 8536
5 Cost of Revenue 1709 1553 1639 1492 6393
6 Total units shipped (in thousands)1
107,896
7 Cost of unit(F5 * 1000/B6) $59.25
8
9 Cost calculations for Maxtor
10 Cost of Revenue (in Millions) (From Maxtor 10K) 3459.3
11 Total units shipped (in thousands)1
53148
12 Cost of unit (B10 *1000/B11) $65.09
13
14 Cost calculation for Western Digital
15 dec 30'05 sep 30 ' 05 June 30 '05 March 31 '05
16 4Q 3Q 2Q 1Q
17 Revenue 1171.1 1009.9 940.4 919.5 4040.9
18 Cost of Revenue 888.8 831.6 780.9 752.9 3254.2
19 Total units shipped (in thousands)166,636.00
20 Cost of unit (F18 * 1000/B19) $48.84
21
221 - Numbers from Gartner Research
From 10K and 10Q (Adjusted for same time period) Total
(Millions)
From 10K and 10Q (Adjusted for same time period) Total
(Millions)
EXHIBIT 8 Channel pricing
Seagate Barracuda 250 GB Hard Drive Model:
7200.8 SATA NCQ - Standard - Internal - Serial
ATA - 7200 Rpm - Cache: 8 MB - Transfer Rate:
760 Mbps…
$95 to $192
Found at 10 stores
Western Digital Caviar RE 250 GB Hard Drive
Standard - Internal - ATA - 7200 Rpm - Cache: 8
MB - Transfer Rate: 100 MBps…
$99 to $132
Found at 19 stores
Retrieved From: http://www.bizrate.com/buy/products__att29--259875-,cat_id--410,keyword--
hard%20disk.html
EXHIBIT 9 Willingness to Pay for specific features (Survey)
PDA Storage
0
5
10
15
20
1 2 3 4
Storage in GB
Incre
ased
WT
P
PDA Power Consumption
0
2
4
6
8
2 6 12 28
Increased # of days of battery life
Incre
ased
WT
P
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Cell Phone Power Consumption
0
2
4
6
8
2 4 6 8Increased # of hrs of talk time
Incre
ased
WT
P
Cell Phone Capacity
0
2
4
6
8
1 2 3 5Capacity in GB
Incre
ased
WT
P
MP3 power consumption
0
2
4
6
8
10
4 8 12Increased # of hrs of playback time
Incre
ased
WT
P
MP3 storage capacity
6.8
6.9
7
7.1
7.2
7.3
7.4
7.5
3 6 10Capacity in GB
Incre
ased
WT
P
EXHIBIT 10 Generic Business Level Strategies of Key Competitors
Low CostUniqueness Perceived
By Customer
Mass Market
Narrow
Segment
(Niche, Few
Market
Segments)
Purple � Cost leadership & broad differentiation
Green � Focused differentiation
Blue � Cost leadership & focused differentiation
80 of 107
EXHIBIT 11 Historical Analysis of Key Ratios
Seagate
Profitability 2005 2004 2003 2002 2001 2000 Industry Market
Gross Profit Margin 28.30% 30.20% 33.50% 32.50% 16.90% 20.60% 38.50% 48.62%
Pre−Tax Profit Margin 9.69% 6.88% 10.18% 3.93% -12.05% 10.55% 10.60% 11.16%
Net Profit Margin 9.40% 8.50% 9.90% 2.50% -- 6.00% 9.33% 7.37%
Return on Equity 27.82% 28.52% 48.71% 23.87% -140.28% 14.20% 15.10%Return on Assets 13.48% 13.42% 18.23% 4.94% -30.88% 9.10% 2.50%Operations
Inventory Turnover 12.30454545 11.30989583 12.96096096 12.28101644 9.5 8.4
Asset Turnover 1.644458959 1.668856415 1.961887477 2.008579442 1 0.4Financial
Current Ratio 1.96741573 1.971955128 1.674247982 1.223955084 1.5046584 2.15 1.33
Debt Ratio 0.141113654 0.188483004 0.212965596 0.242649435 0.303439
Quick Ratio 1.033707865 0.891826923 0.997798973 0.76481597 0.9821429 1.8 0.9
Total Debt to Equity 0.291223928 0.400539084 0.569148936 1.171606864 1.3782542 0.09 1.29 Maxtor
Profitability 2005 2004 2003 2002 2001 2000 1999 Industry Market
Gross Profit Margin 13.70% 24.10% 14.70% 14.00% 17.00% 38.50% 48.62%
Pre−Tax Profit Margin -4.80% 2.55% -6.84% -16.93% 1.24% -1.95% 10.60% 11.16%Net Profit Margin 0 2.50% 0 0 1.20% 0 9.33% 7.37%
Return on Equity -31.21% 14.43% -43.63% -71.43% 11.06% -18.99% 14.20% 15.10%
Return on Assets -8.61% 3.82% -10.95% -23.68% 3.28% -5.35% 9.10% 2.50%Operations
Inventory Turnover 14.65310684 15.75756036 17.84657989 22.360274 21.361864 17.14586 9.5 8.4
Total Asset Turnover 1.569789319 1.607869368 1.48907669 2.0302641 2.801263463 2.809629 1 0.4Financial
Current Ratio 1.136213539 1.179809976 0.877164409 1.0744572 1.27428844 1.306217 2.15 1.33Debt Ratio 0.220004729 0.158989053 0.104752626 0.1063156 0.105083423 0.131082
Quick Ratio 0.774628509 0.878622328 0.574404252 0.6495127 0.759262204 0.87863 1.8 0.9
Total Debt to Equity 0.797394583 0.600693963 0.417524903 0.3207065 0.354626276 0.465153 0.09 1.29 Western Digital
Profitability 2005 2004 2003 2002 2001 2000 1999 Industry Market
Gross Profit Margin 19.90% 18.50% 18.10% 15.20% 13.30% 4.40% 4.60% 38.50% 48.62%
Pre−Tax Profit Margin 5.56% 5.09% 6.93% 2.42% -4.51% -19.13% -17.81% 10.60% 11.16%Net Profit Margin 5.50% 5.00% 6.70% 3.00% -- -- -- 9.33% 7.37%
Return on Equity 28.81% 31.83% 57.54% 50.63% -1295.59% 340.98% 320.42% 14.20% 15.10%
Return on Assets 12.73% 13.39% 21.75% 8.18% -17.35% -60.82% -48.20% 9.10% 2.50%Operations
Inventory Turnover 19.33134328 20.15746753 25.9953271 23.95009849 20.730722 16.37007874 15.96491 9.5 8.4
Total Asset Turnover 2.648518815 3.00849215 3.6176725 3.759524642 3.4779667 2.39023199 2.245102 1 0.4Financial
Current Ratio 1.443127673 1.460725848 1.471425746 1.070631216 1.1334117 1.014154123 1.098468 2.15 1.33
Debt Ratio 0.033173864 0.058574879 0 0.135385582 0.2215876 0.366309292 0.532179
Quick Ratio 1.085033598 1.177202249 1.259837849 0.898112442 0.8680576 0.748371153 0.797159 1.8 0.9
Total Debt to Equity 0.075060533 0.139253486 0 0.837706511 16.544118 -2.053734062 -3.537711 0.09 1.29 Toshiba (Corporation)
Profitability 2005 2004 2003 2002 2001 2000 1999 Industry Market
Gross Profit Margin 26.40% 27.00% 26.70% 24.50% 27.40% 26.00% 26.60% 38.50% 48.62%
Pre−Tax Profit Margin 1.89% 2.60% 0.94% -6.98% 3.16% 10.60% 11.16%
Net Profit Margin 0.80% 0.50% 0.30% -- 1.60% -- -- 9.33% 7.37%
Return on Equity 11.52% 16.28% 7.11% -53.41% 17.95% 14.20% 15.10%
Return on Assets 2.42% 3.25% 1.01% -6.97% 3.29% 9.10% 2.50%Operations
Inventory Turnover 6.659248887 6.883605153 6.601997882 5.238352937 4.7458591 4.943798735 4.107064 9.5 8.4
Total Asset Turnover 1.280663455 1.228942828 1.117190441 0.944778933 0.9482784 1.041755284 0.925944 1 0.4Financial
Current Ratio 1.091525874 1.069461187 1.000929015 0.931085118 1.0726338 1.093154039 1.106823 2.15 1.33
Debt Ratio 0.243129044 0.279385026 0.336171498 0.36233146 0.3441354 0.362191
Quick Ratio 0.624611545 0.624065278 0.540952172 0.507081277 0.5846445 0.650682404 0.548755 1.8 0.9
Total Debt to Equity 1.157491516 1.399516141 2.357660837 2.778049423 1.8799214 1.86011 0.09 1.29
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EXHIBIT 12 Historical Plot of Key Ratios
Gross Profit Margin
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry 05
Market
Toshiba
Fujitsu
ROE
-100.00%
-50.00%
0.00%
50.00%
100.00%
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
Market
Toshiba
Fujitsu
ROA
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
MArket
Toshiba
Fujitsu
Inventory Turnover
0
5
10
15
20
25
30
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
Market
Toshiba
Fujitsu
Total Asset Turnover
0
0.5
1
1.5
2
2.5
3
3.5
4
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
Market
Toshiba
Fujitsu
Current Ratio
0
0.5
1
1.5
2
2.5
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
Market
Toshiba
Fujitsu
Debt Ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
1998 2000 2002 2004 2006
WDC
STX
MXO
Toshiba
Fujitsu
Total Debt to Equity
0
0.5
1
1.5
2
2.5
3
1998 2000 2002 2004 2006
WDC
STX
MXO
Industry
Market
Toshiba
Fujitsu
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EXHIBIT 13 Seagate Product Portfolio by Segment and Maxtor Comparables
Category Seagate’s Products Maxtor’s Comparable Overlap
Desktop Storage Barracuda 7200, Barracuda 5400,
DB35 series, ST1 series, LD25 Series, EE25
series
DiamondMax 11
DiamondMax 10
DiamondMax 16
DiamondMax 8s
DiamondMax Plus 8
DiamondMax Plus 9 QuickView 500
QuickView
QuickView Expander
Significant
Mobile Storage External drives with upto 500GB capacity,
5GB, 6GB pocket hard disk drive, 4GB, 8GB
CompactFlash photo storage Hard drives
Momentus 7200
Momentus5400
Momentus4200
Maxtor OneTouch III USB 2.0
Maxtor OneTouch III FireWire 400 and USB 2.0
Maxtor OneTouch III Turbo Edition
Maxtor OneTouch II Small Business Edition
Maxtor OneTouch II FireWire 800
Maxtor OneTouch II FireWire/USB
Maxtor OneTouch II USB
Personal Storage 3200
Personal Storage 3100
Minimal
Cheetah 15K.4, Cheetah 10K.7, Savvio
10K.1, NL35 Series SATA
Nearline-ready 500GB, 400GB and 250GB
SATA disc drives
Atlas 15K II SAS, Atlas 15K II, Atlas 15K
Atlas 10K V SAS Atlas 10K V
Atlas 10K IV
MaXLine Pro 500
MaXLine III
MaXLine Plus II
MaXLine II
Enterprise storage Significant
EXHIBIT 14 Seagate Product Introduction Summary (2005)
Category 2005 Product Introductions (12 separate products) Enterprise o Newer version of Barracuda and Cheetah in enterprise market
Desktop segment (PC)
o Larger and more portable external disk drives o Additional capacity models for 2.5” to meet customer needs in the
mobile computing.
Desktop segment (non-PC)
o 1” form factor disc drive for consumer electronics such as digital music players and digital cameras
o 3.5” form factor drives for larger capacity DVRs and Home media storage
o New models for 2.5” form factors for game consoles and less heat producing home computers and entertainment devices.
o Hard drive for automobile applications
EXHIBIT 15 Seagate Segment Interface, Speed, and Form Factors
Category Interface Speed (RPM) Form Factor Enterprise (Mission Critical)
Fibre Channel, SAS, SCSI, SATA
15K, 10K 3.5”
Desktop Segment SATA, ATA 7200, 5400 3.5”, 2.5”
Mobile (Notebook) ATA 5400, 4200 1.0”
Mobile(Consumer) CE ATA 4200, <4200 1.0”
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EXHIBIT 16 Seagate Business Level Strategy
Category Business Level Strategy
Enterprise Applications Use customization and strategic relationships (service/support) to differentiate against competitors. Quality and reliability are not sources of competitive advantage. Seagate produces newer versions of enterprise application storage devices with increasing storage capacity, features, and interfaces.
Desktop (PC) Applications Strategy mainly focused on developing better 3.5” form factor drives for home media centers and near-line enterprise applications.
Mobile Applications Strategy mainly focused on high storage capacity in the 2.5” form factor at as low power.
Desktop (non-PC) Applications Seagate’s 2005 first 1” form factor drive addresses emerging digital music player & cameras. The firm’s focus is on improving the form factor and shock tolerance in applications like the 8GB CompactFlash Hard disk drive.
EXHIBIT 17 Seagate and Maxtor’s Strengths and Weaknesses
Strengths Weaknesses Seagate • Market share in desktop, enterprise
• Innovation (1st to introduce perpendicular recording, working on PROBE)
• Cash position
• Utilization of manufacturing lines
• Good strategic relations with OEM vendors, dealers, system integrators. Provide them price protection.
• Good customization – adds value to customer
• Product quality25 � 5 year warranty
• Form factor – lagers but quick to adapt
• Good supplier relationships
• Customer service � warranty
• Supply chain technology � lowers cost26
• Patents27
• Lack of presence in mobile computing (fast growing)
• Flash technology
• Poor retail channel relations
Maxtor • Good manufacturing facilities (Merian, 2005)
• Market share in desktop, enterprise
• Labor skills – good engineers
• Retail channel management
• People
• Product innovation awards
• Better brand, Fortune 500 Company
• No presence in mobile computing
• Losing money � inefficient mfg line
• Cash flow problems
• Products are not always customer focused.
25 http://www.cbronline.com/companyprofile.asp?guid=5DFD872C-D623-4749-A7D2-7E548D1A95C1&CType=Background 26 http://www.ida.gov.sg/idaweb/ebiz/infopage.jsp?infopagecategory=&infopageid=I1297&versionid=5 27 http://www.cbronline.com/companyprofile.asp?guid=5DFD872C-D623-4749-A7D2-7E548D1A95C1&CType=Background
84 of 107
EXHIBIT 18 Value Chain Analysis
INBOUNDLOGISTICS
OPERATIONS OUTBOUNDLOGISTICS
MARKETING& SALES
AFTER SALESSERVICE
Procurement
TechnologyDevelopment
HumanResources
Infrastructure
Same parts are usedacross multiple productlines.
Low er cost.
Same line is used for differentform factors.
High operating eff iciencies.
Automation of manufacturing to save costs, improve eff iciency and f lexibility.
6 sigma for product quality, reliability and cost.
First to adopt new technology.
Good Interaction betw een R&DAnd manufacturing teams
Consolidate employees
R&D functions in a way to fosterinnovation.
High inventoryturnover.
Integrate supplychain w ith customersto reduce Workingcapital costs.
Cost Drivers
Value Drivers
Cost and Valuedrivers
Cost DriversCost Drivers
Value Drivers
Cost and Valuedrivers
Value Drivers
Cost and Valuedrivers
Products with high shock tolerance, low form factor,low power consumption.
Invest in R&D
Customized products.
No cool factor products.
Technology innovator
Integrate supplychain w ith supplier.
Use supplier as analternative to dealwith f luctuating market demands
Backward integrateall critical components (read/write heads)
Participate in designfor some components
Variety of products in allvertical segments
Strategic relationshipwith OEMs/Distributors.
Worldw ide sales force
New products are constantly introduced. 10products are being introduced in 2006.
First to offer 5 year warranty forproducts shipped through OEM,distribution and retail.
Manufacturing plants across theworld.
Strong cash position.
Manufacturing linesacross the world
MARGIN (P-C)
85 of 107
EXHIBIT 19 VRIO Analysis
Resource/Capability Value Rare/ Scarce
Easy to Imitate
Organized to Exploit
Impact on Competition
Uses core components in all products allows the same manufacturing lines to be used for various products
Y Y Y Y Parity
Lower operating costs Y Y N (operating efficiencies require process to be fine tuned and years of experience)
Y SCA
Use of perpendicular technology Y Y Y (first to mkt. with this)
Y Parity
Better process over the years, better yield
Y Y N (tacit knowledge for process improvement)
Y SCA
Product customization Y N -- Y Parity
Named 2006 Company of the Year by Forbes Magazine
Y Y N Y SCA
Product and service category awards Y Y N Y SCA
OEM and Partner awards Y Y N Y SCA
United Nations Global Compact signatory
Y Y N (culture and corporate governance)
Y SCA
Lower employee turnover rate of 9% compared to target of 10%
Y N N (depends on culture and work env.)
Y SCA
Employee recognition programs Y Y Y Y SCA
Holds 2,710 issued patents and over 1,000 pending patent applications
Y Y N Y SCA
Ability to backward integrate Y Y N Y SCA
Applies Six Sigma practices to improve product quality and reliability
Y Y N (fine tuned processes and controls)
Y SCA
Strategic relationships with OEM customers
Y Y Y Y SCA
Commitment to R&D Y N -- Y Parity
ISO9000 Certification Y Y N (strict quality stds.)
Y SCA
Competitive employee compensation with base pay in addition to pay-for-performance and profit sharing
Y N -- Y Parity
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EXHIBIT 20 Seagate 5-Year Financial Performance
Profitability 2005 2004 2003 2002 2001 2000 Industry Market
Gross Profit Margin 28.30% 30.20% 33.50% 32.50% 16.90% 20.60% 38.50% 48.62%Pre−Tax Profit Margin 9.69% 6.88% 10.18% 3.93% -12.05% 10.55% 10.60% 11.16%
Net Profit Margin 9.40% 8.50% 9.90% 2.50% -- 6.00% 9.33% 7.37%Return on Equity 27.82% 28.52% 48.71% 23.87% -140.28% 14.20% 15.10%
Return on Assets 13.48% 13.42% 18.23% 4.94% -30.88% 9.10% 2.50%Operations
Inventory Turnover 12.30455 11.3099 12.96096 12.28102 9.5 8.4
Asset Turnover 1.644459 1.668856 1.961887 2.008579 1 0.4Financial
Current Ratio 1.967416 1.971955 1.674248 1.223955 1.504658 2.15 1.33Debt Ratio 0.141114 0.188483 0.212966 0.242649 0.303439
Quick Ratio 1.033708 0.891827 0.997799 0.764816 0.982143 1.8 0.9Total Debt to Equity 0.291224 0.400539 0.569149 1.171607 1.378254 0.09 1.29
EXHIBIT 21 Key Seagate Financial Performance 5-Year Metrics
Profitability Ratios
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
1998 2000 2002 2004 2006
Gross Profit Margin
Pre-tax profit Margin
Net profit Margin
ROE
ROA
Operational Ratios
0
2
4
6
8
10
12
14
2000 2002 2004 2006
Inventory
Turnover
Asset
Turnover
Financial Ratios
0
0.5
1
1.5
2
2.5
2000 2001 2002 2003 2004 2005 2006
Current Ratio
Debt Ratio
Quick Ratio
Debt to Equity
87 of 107
EXHIBIT 22 Maxtor 5-Year Financial Performance
Profitability 2005 2004 2003 2002 2001 2000 1999 Industry Market
Gross Profit Margin 13.70% 24.10% 14.70% 14.00% 17.00% 38.50% 48.62%Pre−Tax Profit Margin -4.80% 2.55% -6.84% -16.93% 1.24% -1.95% 10.60% 11.16%
Net Profit Margin 0 2.50% 0 0 1.20% 0 9.33% 7.37%Return on Equity -31.21% 14.43% -43.63% -71.43% 11.06% -18.99% 14.20% 15.10%
Return on Assets -8.61% 3.82% -10.95% -23.68% 3.28% -5.35% 9.10% 2.50%Operations
Inventory Turnover 14.65311 15.75756 17.84658 22.36027 21.36186 17.14586 9.5 8.4
Total Asset Turnover 1.569789 1.607869 1.489077 2.030264 2.801263 2.809629 1 0.4Financial
Current Ratio 1.136214 1.17981 0.877164 1.074457 1.274288 1.306217 2.15 1.33
Debt Ratio 0.220005 0.158989 0.104753 0.106316 0.105083 0.131082Quick Ratio 0.774629 0.878622 0.574404 0.649513 0.759262 0.87863 1.8 0.9
Total Debt to Equity 0.797395 0.600694 0.417525 0.320707 0.354626 0.465153 0.09 1.29
EXHIBIT 23 Key Maxtor Financial Performance 5-Year Metrics
Profitability Ratios
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
1998 2000 2002 2004 2006
Gross Profit Margin
Pre-Tax Profit Margin
Net Prof it Margin
ROE
ROA
Operational Ratios
0
5
10
15
20
25
1998 2000 2002 2004 2006
Inventory
Turnover
Asset Turnover
Financial Ratios
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1998 2000 2002 2004 2006
Current Ration
Debt Ratio
Quick Ratio
Debt to Equity
88 of 107
EXHIBIT 24 Seagate and Maxtor Recent Stock Performance
EXHIBIT 25 Maxtor’s 5 Year Trailing Revenue Growth
2000 2001 2002 2003 2004
Revenues $2,705 $3,766 $3,780 $4,086 $3,796
Other 0 0 0 0 0
Total Sales (millions) 2704.859 3765.559 3779.514 4086.443 3796.328
1 Year Growth % 39.21% 0.37% 8.12% -7.10%
3 Year Trailing CAGR % 14.74% 0.27%
4 Year Trailing CAGR % 8.84%
Revenue
$0
$1,000
$2,000
$3,000
$4,000
$5,000
1999 2000 2001 2002 2003 2004 2005
Revenue
89 of 107
EXHIBIT 26 Sources of Data for DCF Calculation
Weighted Average Cost Of Capital Seagate Maxtor
Borrowing rate 10.34% 10.34%
Share Price (12/19/05) 2033.00% 452.00%
Outstanding shares 482000000 254040000
Beta 2.7 2.7
Risk Free rate 4.68% 4.46%
Market return 7.00% 7.00%
Expected return 10.94% 11.32%
Debt 1136 581860000
Equity 2541000000 1148260800
Debt + Equity 3677000000 1730120800
WACC 10.48% 10.77%
Sources of Values for DCF Seagate Maxtor Combined
Sales growth rate 11.00% 6.50% 9.00%
% COGS* 75.51% 81.88% 75.51%
WACC 10.48% 10.77% 10.55%
% SG&A* 5.51% 4.25% 5.51%
% R&D* 10.17% 9.66% 10.17%
% D&A* 0.07% 2.87% 0.07%
GDP Growth 3.75% 3.75% 3.75%
Other Income* 0.36% 1.38% 0.36%
Interest* 0.83% 0.71% 0.83%
Tax Rate* 8.73% 8.73% 8.73%
Cap Ex* 0.00% 0.00% 0.00%
Incremental change in working capital
with incremental in sales -55.90% -41.54% -55.90%
*Percentages are an average of last five years of percent of sales
EXHIBIT 27 Summary of Maxtor DCF Calculation
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Sales 2,704.86 3,765.56 3,779.51 4,086.44 3,796.33 4,043.09 4,305.89 4,585.77 4,883.85 5,079.20 5,282.37 5,493.67
Cost of goods Sold 2,328.35 3,427.18 3,382.01 2,285.39 3,423.95 3,310.44 3,525.62 3,754.78 3,998.84 4,158.80 4,325.15 4,498.16
SG&A 110.51 252.91 148.49 131.70 127.93 172.03 183.21 195.12 207.81 216.12 224.76 233.75
R&D 235.01 435.92 401.01 354.05 325.31 390.49 415.87 442.91 471.69 490.56 510.18 530.59
Income from operation 31.00 -350.45 -152.00 1,315.30 -80.86 170.13 181.18 192.96 205.50 213.72 222.27 231.16
Other Income 24.29 21.47 123.82 50.99 30.09 9.56 10.18 10.84 11.55 12.01 12.49 12.99
EBITDA 55.29 -328.98 -28.17 1,366.29 -50.78 179.68 191.36 203.80 217.05 225.73 234.76 244.15
Depreciation & Amor 99.06 217.78 82.25 85.28 35.99 3.04 123.57 131.60 140.15 145.76 151.59 157.65
Interest Expense 13.73 25.19 26.95 30.60 31.78 28.60 30.46 32.44 34.54 35.93 37.36 38.86
Taxable Income -57.50 -571.95 -137.37 1,250.40 -118.55 148.05 37.34 39.77 42.35 44.05 45.81 47.64
Taxes -5.02 -49.93 -11.99 109.16 -10.35 12.92 3.26 3.47 3.70 3.85 4.00 4.16
NOPAT -52.48 -522.01 -125.38 1,141.24 -108.20 135.12 34.08 36.30 38.66 40.20 41.81 43.48
Add Dep and Amor 46.58 -304.24 -43.13 1,226.52 -72.21 138.16 157.65 167.90 178.81 185.96 193.40 201.14
Capital Expenditure 0.00 0.00 0.00 0.00 0.00 0.00 0.00
less Capital Expenditure 46.58 -304.24 -43.13 1,226.52 -72.21 138.16 157.65 167.90 178.81 185.96 193.40 201.14
Change in WC -20.74 -370.75 -202.51 208.59 139.62 -102.50 -109.16 -116.26 -123.82 -81.15 -84.39 -87.77
less Change in WC 67.32 66.51 159.39 1,017.94 -211.82 240.66 266.81 284.15 302.62 267.11 277.79 288.90
Free Cash Flow 67.32 66.51 159.39 1,017.94 -211.82 240.66 266.81 284.15 302.62 267.11 277.79 288.90
Discount Factor 0.90 0.82 0.74 0.66 0.60 0.54
Discounted Cash Flow 0.00 0.00 256.53 246.65 196.54 184.54 187.58 0.00
90 of 107
Terminal Value 2673.2897
Present value of TV 1603.2323
Net Present Value 2675.0785
Terminal value percent 59.93%
Outstanding shares M 254.04
Share Value 10.530147
EXHIBIT 28 Maxtor DCF valuation with different growth rates
Growth 6.50% 1% 3% 5% 7% 9%
NPV 2675.08 2031.75 2252.22 2487.92 2739.493 3007.565
EXHIBIT 29 Comparable Firm Ratios
Market
Comparables Adjustment
Adjusted
Market
Comparables Maxtor Valuation Note
Adjusted Market Cap/Revenue 1.136459841 10.00% 1.250105825 $3,870.00 $4,837.91
Adjusted Market Cap/EBIT 24.79814294 10.00% 27.27795724 -$151.92 -$4,144.01
Adjusted Market Cap/EBITDA 10.01598914 10.00% 11.01758805 $130.69 $1,439.89
Adjusted Market Cap/Earnings 28.67793045 10.00% 31.5457235 -$183.44 -$5,786.72 Not considered
Stock Price/EPS – 2006 17.47019777 10.00% 19.21721754 -0.722087073 -$61,810.82 Not considered
$711.26Average Valuation of Maxtor Corporation
EXHIBIT 30 Comparable Firm Valuation Adjustments
PUBLIC COMPARABLES:
PERFORMANCE MAX MIN AVERAGE Maxtor Adjustment
Debt/Equity Ratio 0.064 0 0.032 1.0370 -10.00%
Operating Margin 7.53% 6.99% 7.26% -0.67% -10.00%
Profit Margin 8.31% 7.15% 7.73% -2.49% -10.00%
Revenue Growth 14.62% 4.26% 9.44% -0.90% -10.00%
Projected EPS growth 2006 13.20% -3.10% 5.05% 101.38% 10.00%
Projected EPS growth 2007 10.08% 10.08% 10.08% N/A 0.00%
TOTAL ADJUSTMENT FOR PERFORMANCE -30.00%
Performance -30.00%
Control Premium 40.00%
Public Comparables Adjustment 10.00%
ADJUSTMENTS
EXHIBIT 31 Maxtor Valuation Summary
Valuation Summary Valuation Weighting
Weighted
Average
ValuationPublic Comparables 711.26 40% 284.504
Related Industry M&A N/A N/A 0.00
Discounted Cash Flows 2675 60% 1605
Maxtor Average Valuation 1889.504
EXHIBIT 32 Merged Firm Projected Revenue and Growth Rate
91 of 107
2005 2006 2007 2008 2009 2010 2011
7553 12689.72 13891.824 15213.565 16545.1880 17206.9955 17895.2753Growth 68.01% 9.47% 9.51% 8.75% 4.00% 4.00%
EXHIBIT 33 Merged Firm Valuation Summary
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Sales $4,950 $6,087 $6,486 $6,224 $7,553 12,689.72 13,831.79 15,076.66 16,433.56 17,912.58 18,808.20
Cost of goods Sold 3,737.00 4,494.00 4,759.00 4,765.00 5,880.00 9,856.60 10,444.97 11,385.02 12,409.67 13,526.54 14,202.87
SG&A 272.58 498.00 357.00 290.00 306.00 344.88 491.67 587.22 686.24 789.55 858.55
R&D 503.27 698.00 670.00 666.00 645.00 1,290.16 1,406.28 1,532.84 1,670.80 1,821.17 1,912.23
Income from operation 437.15 397.00 700.00 503.00 722.00 1,198.07 1,488.88 1,571.58 1,666.85 1,775.31 1,834.55
Other Income 17.66 25.00 16.00 17.00 36.00 45.27 49.34 53.78 58.62 63.90 67.10
EBITDA 454.81 422.00 716.00 520.00 758.00 1,243.34 1,538.22 1,625.36 1,725.47 1,839.21 1,901.65
Depreciation & Amor 3.57 19.00 9.15 9.97 10.87 11.85 12.92 13.56
Interest Expense 41.14 77.00 47.00 47.00 48.00 105.47 114.96 125.31 136.58 148.87 156.32
Taxable Income 410.10 326.00 669.00 473.00 710.00 1,128.73 1,413.29 1,489.18 1,577.04 1,677.42 1,731.77
Taxes 35.81 28.47 58.42 41.30 62.00 98.56 123.41 130.04 137.71 146.48 151.22
NOPAT 374.29 297.53 610.58 431.70 648.00 1,030.16 1,289.88 1,359.14 1,439.33 1,530.94 1,580.55
Add Dep and Amor 377.86 316.53 610.58 431.70 648.00 1,039.31 1,299.85 1,370.02 1,451.18 1,543.86 1,594.11
Capital Expenditure 0.00 0.00 0.00 0.00 0.00 0.00
less Capital Expenditure 377.86 316.53 610.58 431.70 648.00 1,039.31 1,299.85 1,370.02 1,451.18 1,543.86 1,594.11
Change in WC 0.00 145.00 180.00 591.00 221.00 -573.62 -631.80 -696.07 -716.35 -340.78 -354.41
less Change in WC 377.86 171.53 430.58 -159.30 427.00 1,612.93 1,931.65 2,066.08 2,167.53 1,884.64 1,948.52
Free Cash Flow 377.86 171.53 430.58 -159.30 427.00 1,612.93 1,931.65 2,066.08 2,167.53 1,884.64 1,948.52
Discount Factor 0.90 0.82 0.74 0.67 0.61 0.55
Discounted Cash Flow 0.00 1,747.26 1,690.46 1,604.17 1,261.66 1,179.91 823.82
Terminal Value 12109.2036
Present value of TV 6632.63528
Net Present Value 14939.9119
Terminal value percent 44.40%
Outstanding shares M 575.99
Share Value 25.9375812
Maxtor shares 254.04
conversion 0.37
maxtor shares in new 93.9948
EXHIBIT 34 Merged Firm Valuation Growth Rate Sensitivity
Growth 9% 4% 9% 11% 15% 20%
NPV $14,940 13108.49 14939.91 15740.96 17468.22 19877.066
Share Value $26 22.76 25.94 27.33 30.33 34.509107
EXHIBIT 35 Merged Firm Valuation Cost Saving Sensitivity
Savings $300.00 $50 $100 $200 $300 $500
NPV 14939.91 14298.04 14426.41 14683.16 14939.91 15453.409
Share Value 25.94 24.82 25.05 25.49 25.94 26.829078
92 of 107
EXHIBIT 36 Seagate Standalone Projected Sales Growth
2001 2002 2003 2004 2005
Revenues $4,950 $6,087 $6,486 $6,224 $7,553
Other 0 0 0 0 0Total Sales (millions) 4950 6087 6486 6224 75531 Year Growth % 22.97% 6.55% -4.04% 21.35%3 Year Trailing CAGR % 7.93% 7.46%
4 Year Trailing CAGR % 11.14%
EXHIBIT 37 Seagate Standalone Valuation
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Sales $4,950 $6,087 $6,486 $6,224 $7,553 8,383.83 9,306.05 10,329.72 11,465.99 11,924.63 12,401.61
Cost of goods Sold 3,737.00 4,494.00 4,759.00 4,765.00 5,880.00 6,330.98 7,027.39 7,800.41 8,658.45 9,004.79 9,364.98
SG&A 272.58 498.00 357.00 290.00 306.00 461.67 512.45 568.82 631.39 656.65 682.91
R&D 503.27 698.00 670.00 666.00 645.00 852.38 946.14 1,050.22 1,165.74 1,212.37 1,260.87
Income from operation 437.15 397.00 700.00 503.00 722.00 738.80 820.06 910.27 1,010.40 1,050.82 1,092.85
Other Income 17.66 25.00 16.00 17.00 36.00 19.82 22.00 24.42 27.11 28.19 29.32
EBITDA 454.81 422.00 716.00 520.00 758.00 758.61 842.06 934.69 1,037.50 1,079.00 1,122.17
Depreciation & Amor 3.57 19.00 6.71 7.45 8.27 8.60 8.94
Interest Expense 41.14 77.00 47.00 47.00 48.00 69.68 77.34 85.85 95.30 99.11 103.07
Taxable Income 410.10 326.00 669.00 473.00 710.00 688.93 758.01 841.39 933.94 971.30 1,010.15
Taxes 197.00 86.00 19.00 -101.00 25.00 60.16 66.19 73.47 81.55 84.82 88.21
NOPAT 213.10 240.00 650.00 574.00 685.00 628.78 691.82 767.92 852.39 886.48 921.94
Add Dep and Amor 216.67 259.00 650.00 574.00 685.00 628.78 698.53 775.36 860.65 895.08 930.88
Capital Expenditure 0.00 0.00 0.00 0.00 0.00 0.00
less Capital Expenditure 216.67 259.00 650.00 574.00 685.00 628.78 698.53 775.36 860.65 895.08 930.88
Change in WC 0.00 145.00 180.00 591.00 221.00 -464.45 -515.54 -572.25 -635.20 -256.39 -266.65
less Change in WC 216.67 114.00 470.00 -17.00 464.00 1,093.23 1,214.07 1,347.62 1,495.85 1,151.47 1,197.53
Free Cash Flow 216.67 114.00 470.00 -17.00 464.00 1,093.23 1,214.07 1,347.62 1,495.85 1,151.47 1,197.53
Discount Factor 0.91 0.82 0.74 0.67 0.61 0.55
Discounted Cash Flow 0.00 1,098.92 1,104.11 1,109.32 772.93 727.61 728.19
Terminal Value 10822.568
Present value of TV 5952.0296
Net Present Value 11493.111
Terminal value percent 51.79%
Outstanding shares M 482.00
Share Value 23.844629
EXHIBIT 38 Market Reaction to Acquisition Announcement
0
5
10
15
20
25
30
35
5-
Jan-
98
15-
Apr-
98
24-
Jul-
98
1-
Nov-
98
9-
Feb-
99
20-
May-
99
28-
Aug-
99
6-
Dec-
99
15-
Mar-
00
23-
Jun-
00
1-
Oct -
00
9-
Jan-
01
19-
Apr-
01
28-
Jul-
01
5-
Nov-
01
13-
Feb-
02
24-
May-
02
1-
Sep-
02
10-
Dec-
02
20-
Mar-
03
28-
Jun-
03
6-
Oct -
03
14-
Jan-
04
23-
Apr -
04
1-
Aug-
04
9-
Nov-
04
17-
Feb-
05
28-
May-
05
5-
Sep-
05
14-
Dec-
05
24-
Mar-
06
2-
Jul-
06
Maxtor
Seagate
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EXHIBIT 39 Merged Firm Future Revenue
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
16,000.00
18,000.00
20,000.00
2004 2006 2008 2010 2012
combined revenue
seagate
Maxtor
Revenues afterMerger
Revenue Synergy
EXHIBIT 40 Merged firm Income from Operations
Income from Operations
0.00
500.00
1,000.00
1,500.00
2,000.00
2004 2006 2008 2010 2012
After MergeOperating Income
Seagate
Maxtor
Sum of operatingIncome
EXHIBIT 41 Merged Firm EPS
Seagate Current EPS 0.52
Dividends 0.32
Projected EPS after Merger 1.46849239
Percent increase in EPS 182.40%
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EXHIBIT 42 Future Seagate Stock Price Simulation
Seagate Stock Price Using Montecarlo Simulation (Geometric
Brownian Motion)
$20
$22
$24
$26
$28
$30
$32
$34
$36
$38
$40
1 33 65 97 129 161 193 225 257 289 321 353 385 417 449 481 513
Trading Days
Sto
ck
Pri
ce
Growth 9%
Growth 4%
Growth 11%
Growth 15%
Growth 20%
EXHIBIT 43 Comparison of Product Lines across Different Competitors
Seagate Maxtor Western
Digital
Hitachi
GST
Samsung Toshiba Fujitsu Cornice
Mobile Momentus
DB35 Series
ST1 Series
LD25 Series
EE25 Series
QuickView
Family
Scorpio Travelstar
Endurastar
Microdrive
Deskstar
Spinpoint
V120CE
Series
Spinpoint
V80CE Series
Spinpoint
M40S Series
Spinpoint
M40 Series
0.85-Inch
HDD
1.8-Inch
HDD
2.5-Inch
HDD
2.5-Inch Dragon
Series
Desktop Barracuda
External 3.5”
HDD
Portable/Pocke
t HDD
Seagate Mirra
DiamondMax
Family
OneTouch III
Family
OneTouch II
Family
Maxtor
Basics Family
Raptor X
Caviar
SE16
Caviar SE
Caviar
Deskstar Spinpoint P80
Series
Spinpoint
P80SD
Spinpoint V80
Series
Spinpoint
PL40
Spinpoint
P120 Series
Enterprise Cheetah
Savvio
NL35 Series
Atlas 15K
Family
Atlas 10K
Family
MaXLine
Family
Raptor
Caviar
RE2
Caviar RE
Ultrastar
Series
3.5-Inch
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EXHIBIT 44 Integration Planning Objectives
Goals Actions Time Frame (start-end)
Appoint Integration Leader
Appointment of integration leader, preferably from Maxtor’s higher management to drive the integration and ensure employee buy-in.
Immediate
Communication to employees
Communicate the going forward strategy to employees and establish grievance handling center and appoint key contact persons to address immediate issues and queries. Cross company team building exercises.
Immediate
HR-Retention of Talent
Complete the offer to the Maxtor’s employees and make sure they receive equal or better benefit package than at Maxtor.
Immediate
Retail channel Management
Take control of the retail channels and distribution network and ship products with Maxtor and Seagate logo.
Immediate
Communication to Suppliers
Optimize the number of suppliers and consolidate the supply from sources selected based on predetermined criteria.
0-6 months
Communication to Customers
Retain maximum number of Maxtor’s customer. Contact all the customers and communicate the value proposition.
0-6 months
HR – Optimize the support functions
Optimize the workforce to eliminate duplicate functions in HR, Sales, Operations, marketing etc. Address any morale issues arising due to layoffs.
0-6 months
Normalize the product range
Choose the product range for best depth and breadth. Sunset the Seagate and Maxtor products that are redundant and take the best product mix going forward.
0-6 months
Implement Seagate production and Logistic systems at Maxtor locations
Plan for and implement Seagate’s ERP, Financial and QA systems
0-1 Year
Implement common management information systems
Implement Seagate’s MIS systems at Maxtor’s locations. 0-1 Year
Brand Leverage Leverage Maxtor’s brand image in retail and slowly replace the Maxtor brand with Seagate.
1-2 Years.
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9 INTERVIEW QUESTIONNAIRE
Seagate and Maxtor Interview Questions
1. What is your position in the organization? What is your role?
2. How long have you been with Seagate or Maxtor?
3. Can you review the disk drive development process in the following diagram for accuracy?
Head, DiskAssembly
InterfaceElectronicsIntegration
FirmwareDevelopment
ProductionTesting
CustomerSpecific
FirmwareCustomization
Research,Heads&MediaMMC
Operations &Supply ChainMgmtEnterprise, Personal & Consumer Divisions
Chips, PCB, Servo Control electroncis for :
� IDE� SCSI� SATA� Fibre Channel
� Motors� Actuators� Heads� Read/Write
Channels
4. How can this diagram be improved to be more accurate?
WilliamWatkins
CEO
Sherman Black,VP&GM
Enterprise
Carl Chicca,VP&GMPersonalCompute
James DruckreyVP&GMBrandedSolutions
Mark KryderSenior VP/CTO
Research
Brodie KeastSVP&GMConsumer
Jerry GlembockiSenior VP
Heads & Media
Phil Pollok, SVPNew Business
Initiatives
DaveWickersham
COO
Jim ChiricoSVP
Disk DriveOperations
Seagate Executive Management Team
Bob WhitmoreSVP
ProductDevelopment
Charles PopeEVPCFO
William HudsonEVP
Counsel
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5. What systems of employee incentives and accountability does management at Seagate
utilize? at Maxtor? 90 day objectives? Performance based bonuses? How does
management measure development and production success: first to market?
6. Seagate has joined the United Nations Global Compact? What impact have you seen
around the company of this move by the company?
7. How would you describe the culture of Seagate and Maxtor? Is your work environment:
competitive, hostile, conflicting, friendly, and collaborative, etc?
8. Seagate emphasizes “ownership and vertical integration.” How would you compare this
strategy with that of Maxtor/MMC?
9. How do you see the organization changing in the future and how do you see your role
changing?
10. Seagate has a high level commitment to new applications in the consumer segment? This
seems like a very exciting initiative at Seagate. How is that effort measured at a
corporate level relative to traditional enterprise, desktop, and mobile segments?
11. Are there clearly defined processes and procedures that employees across the
organization utilize? Do you think that the organization is effective as it is today?
12. What questions do you think I should have asked?
13. If you were the CEO of Seagate/Maxtor, what one thing would you do with the business
that is not currently being done?
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10 SURVEY QUESTIONS & RESULTS
Survey 1:
Goal: Calculate Willingness to Pay for a specific Consumer Electronic feature.
Key Statistics:
Total # of survey responses is 71.
Link to survey: http://www.zoomerang.com/recipient/survey-intro.zgi?p=WEB2254ELFT9UQ
Drawbacks: Demographics were not taken into consideration.
o 15% of respondents did not own a PDA
o 10% of respondents did not own an MP3 player.
Calculation Methodology:
The following formula was used to calculate the weighted percentage for the survey.
Weighted Percentage = % Most Likely + 0.75 * % Likely - 0.75 * % Unlikely - % of Very Unlikely
For example, in the 1 GB of additional storage capacity question in Survey 1 below, the ‘Greater
than $50 price point’ has a weighted percentage of –49.5%.
The price range for which the weighted percentage was greater than 50% was chosen as the price
point. For example, the price of $10-$25 dollars was selected on the 1 GB of additional storage
capacity question since it had 57.00%. This is shown in the Survey Analysis as Storage capacity
of $10-$25 (1GB).
Survey 2:
Goal: Calculate willingness to pay for incremental increase in value of the feature.
Survey statistics:
Total # of responses: 20
Survey link: http://www.zoomerang.com/recipient/survey-intro.zgi?p=WEB2254JGQVMQX
Drawbacks:
o The sample size is less than 30.
Calculation Methodology:
With a sample size less than 30, willingness to pay can not be calculated by taking the mean
value of the responses. A weighted scheme determines the price. For example, on the question of
2 GB of additional storage capacity in Survey 2, a weighted percentage of –-56% is calculated
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using the ‘Weighted Percentage’ formula above. We give a higher weight to the price range
having a weighted percentage of greater than 50%. If multiple price ranges have a value greater
than 50% the highest price range is chosen. A weight of 0.2 is given to the next higher price
range if it has a weighted percentage greater than 0%. The idea here is to factor in that there are
some customers willing to pay a higher price. Note that only the immediate higher price point is
used. The subsequent higher price points have a negative weighted percentage, so are discarded.
A Net percentage and a price (Value/Willingness to Pay) is calculated using the formula shown
below using the Survey 2 question results on PDA with 2GB of additional storage capacity.
o Price range $P1 - $P2, with a weighted percentage Wp > 50%. ($10-$25 has a Wp of
54.00%)
o Next higher price range $P3 - $P4, with a weighted percentage Wp’ > 0%. ($25 - $50
has a Wp’ of 7.00%)
o Net percentage = (Wp – 50%) * 2 + 0.2 * Wp’
(Net percentage = (54% - 50%) * 2 + 0.2 * 7% = 9.4%.
o Wp – 50% is used as opposed to Wp to have the calculations bounded and not exceed
100% (enter the higher slab of price range)
o Price = P1 + Net Percentage * (P2 – P1). (Price = $10 + 9.4% * ($25 - $10) = $11.41
The $11.41 price point is used in Exhibit 51 graphs.
Survey results are attached.
Survey 1:
For Palm Tungsten PDA, currently costing $199 with 32 MB of storage and 12 days of standby time,
how much more are you willing to pay for the following features. (assuming that the look and size do not change)
1GB of additional data storage capacity.
1 2 3 4 5 Weighted %
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 4% 12% 13% 30% 40% -49.50%
2. $25 - $50 21% 25% 18% 25% 10% 11.00%
3. $10 - $25 44% 26% 24% 2% 5% 57.00%
4. $5 - $10 66% 21% 4% 3% 6% 73.50%
5. Less than $5 84% 5% 3% 2% 6% 80.25%
Data protection even if the device falls from a height of a height of 5 ft.
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1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 3% 5% 17% 25% 50% -62.00%
2. $25 - $50 6% 11% 19% 33% 31% -41.50%
3. $10 - $25 24% 24% 24% 17% 11% 18.25%
4. $5 - $10 49% 23% 14% 5% 9% 53.50%
5. Less than $5 75% 11% 5% 0% 9% 74.25%
Improved battery life to 24 days of standby time.
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 2% 5% 8% 32% 54% -72.25%
2. $25 - $50 2% 11% 16% 37% 34% -51.50%
3. $10 - $25 22% 23% 18% 18% 18% 7.75%
4. $5 - $10 54% 15% 14% 3% 14% 49.00%
5. Less than $5 75% 9% 5% 2% 9% 71.25%
For a Motorola SLVR iTunes Phone, currently costing $199 with 512 MB storage and up to 6 hrs of talk time,
how much more are you willing to pay for the following features (assuming that the look and size does not change)
2GB of additional storage capacity for music
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 3% 16% 15% 21% 44% -44.75%
2. $25 - $50 29% 17% 14% 13% 27% 5.00%
3. $10 - $25 44% 19% 15% 6% 16% 37.75%
4. $5 - $10 67% 13% 7% 0% 13% 63.75%
5. Less than $5 79% 5% 3% 0% 13% 69.75%
Data protection and skip free playback even if the device falls from a height of 5 ft.
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 3% 0% 10% 30% 57% -76.50%
2. $25 - $50 5% 12% 13% 32% 38% -48.00%
3. $10 - $25 27% 14% 21% 17% 21% 3.75%
4. $5 - $10 51% 20% 8% 8% 13% 47.00%
5. Less than $5 77% 8% 2% 3% 10% 70.75%
Improved battery life to 12 hrs of talk time.
1 2 3 4 5
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Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 0% 7% 15% 28% 50% -65.75%
2. $25 - $50 7% 18% 23% 26% 26% -25.00%
3. $10 - $25 35% 30% 14% 6% 14% 39.00%
4. $5 - $10 58% 20% 8% 2% 13% 58.50%
5. Less than $5 81% 5% 6% 0% 8% 76.75%
For an Apple iPod MP3 music player, currently costing $149 with 1GB of storage and up to 12 hrs of battery life (playback time),
how much more are you willing to pay for the following features (assuming the look and size does not change)
10GB of additional storage for music.
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $150 2% 2% 3% 19% 74% -84.75%
2. $100 - $150 5% 6% 8% 29% 52% -64.25%
3. $50 - $100 11% 16% 23% 15% 34% -22.25%
4. $25 - $50 46% 24% 13% 3% 14% 47.75%
5. Less than $25 73% 9% 3% 3% 11% 66.50%
Skip free music playback even if the music player fell more than 2ft.
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 2% 2% 10% 15% 72% -79.75%
2. $25 - $50 5% 7% 10% 22% 57% -63.25%
3. $10 - $25 15% 13% 18% 13% 41% -26.00%
4. $5 - $10 47% 12% 10% 7% 25% 25.75%
5. Less than $5 71% 3% 8% 2% 16% 55.75%
Improved battery life to 24 hrs of playback time.
1 2 3 4 5
Most Likely Likely
Neither Likely Nor Unlikely Unlikely
Very Unlikely
1. Greater than $50 3% 8% 5% 25% 59% -68.75%
2. $25 - $50 8% 15% 20% 17% 40% -33.50%
3. $10 - $25 34% 20% 23% 8% 15% 28.00%
4. $5 - $10 59% 20% 10% 0% 11% 63.00%
5. Less than $5 77% 7% 3% 3% 10% 70.00%
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Survey 2:
For Palm Tungsten PDA, currently costing $199 with 32 MB of storage and 12 days of standby time,
how much more are you willing to pay for the following features. (assuming that the look and size do not change)
For 2 GB of additional storage
1 2 3 4 5 Weighted %
Very likely Likely Neutral Unlikely Very Unlikely
1. Greater than $50 0% 17% 11% 17% 56% -56.00%
2. $25-$50 16% 37% 5% 21% 21% 7.00%
3. $10-$25 39% 39% 6% 11% 6% 54.00%
4. $5-$10 78% 11% 6% 0% 6% 80.25%
5. Less than $5 94% 0% 0% 0% 6% 88.00%
For additional 3 GB of storage capacity
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 6% 11% 11% 22% 50% -52.25%
2. $25-$50 16% 42% 11% 11% 21% 18.25%
3. $10-$25 61% 17% 6% 0% 17% 56.75%
4. $5-$10 72% 17% 0% 0% 11% 73.75%
5. Less than $5 89% 0% 0% 0% 11% 78.00%
For additional 4 GB of storage capacity
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 6% 24% 12% 12% 47% -32.00%
2. $25-$50 39% 28% 6% 11% 17% 34.75%
3. $10-$25 71% 12% 6% 0% 12% 68.00%
4. $5-$10 76% 12% 0% 0% 12% 73.00%
5. Less than $5 88% 0% 0% 0% 12% 76.00%
Improved battery life to 14 days of standby time.
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 0% 0% 5% 16% 79% -91.00%
2. $25-$50 5% 5% 5% 32% 53% -68.25%
3. $10-$25 16% 11% 21% 5% 47% -26.50%
4. $5-$10 32% 16% 11% 0% 42% 2.00%
5. Less than $5 53% 26% 0% 5% 16% 52.75%
Improved battery life to 18 days of standby time.
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 0% 0% 5% 16% 79% -91.00%
2. $25-$50 6% 0% 17% 22% 56% -66.50%
3. $10-$25 11% 16% 32% 5% 37% -17.75%
4. $5-$10 37% 11% 16% 11% 26% 11.00%
5. Less than $5 53% 26% 11% 5% 5% 63.75%
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Improved battery life to 30 days of standby time.
1 2 3 4 5
Very Likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 0% 0% 21% 32% 47% -71.00%
2. $25-$50 5% 21% 37% 11% 26% -13.50%
3. $10-$25 32% 26% 21% 5% 16% 31.75%
4. $5-$10 50% 28% 11% 0% 11% 60.00%
5. Less than $5 83% 6% 6% 0% 6% 81.50%
For a Motorola SLVR iTunes Phone, currently costing $199 with 512 MB storage and up to 6 hrs of talk time,
how much more are you willing to pay for the following features (assuming that the look and size does not change)
An improved battery life to 8 hours of talk time
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater then $50 0% 0% 17% 6% 78% -82.50%
2. $25-$50 0% 11% 22% 0% 67% -58.75%
3. $10-$25 22% 6% 11% 28% 33% -27.50%
4. $5-$10 28% 33% 11% 6% 22% 26.25%
5. less than $5 50% 28% 0% 6% 17% 49.50%
An improved battery life to 10 hours of talk time
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater then $50 0% 6% 17% 6% 72% -72.00%
2. $25-$50 6% 11% 22% 0% 61% -46.75%
3. $10-$25 22% 11% 22% 11% 33% -11.00%
4. $5-$10 33% 28% 17% 6% 17% 32.50%
5. less than $5 61% 17% 6% 0% 17% 56.75%
An improved battery life to 14 hours of talk time
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater then $50 6% 6% 11% 11% 67% -64.75%
2. $25-$50 11% 11% 17% 17% 44% -37.50%
3. $10-$25 28% 6% 33% 17% 17% 2.75%
4. $5-$10 50% 33% 6% 0% 11% 63.75%
5. less than $5 72% 17% 0% 0% 11% 73.75%
1 GB of additional storage capacity
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater then $50 0% 6% 11% 17% 67% -75.25%
2. $25-$50 6% 11% 6% 22% 56% -58.25%
3. $10-$25 17% 17% 22% 11% 33% -11.50%
4. $5-$10 50% 6% 22% 11% 11% 35.25%
5. less than $5 61% 17% 6% 6% 11% 58.25%
3 GB of additional storage capacity
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
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1. Greater then $50 6% 0% 6% 17% 72% -78.75%
2. $25-$50 6% 11% 22% 6% 56% -46.25%
3. $10-$25 22% 11% 22% 17% 28% -10.50%
4. $5-$10 56% 6% 17% 11% 11% 41.25%
5. less than $5 61% 22% 6% 0% 11% 66.50%
5GB of additional storage capacity for music
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater then $50 6% 6% 11% 17% 61% -63.25%
2. $25-$50 6% 17% 28% 11% 39% -28.50%
3. $10-$25 39% 6% 22% 6% 28% 11.00%
4. $5-$10 67% 11% 0% 11% 11% 56.00%
5. less than $5 78% 6% 6% 0% 11% 71.50%
For an Apple iPod MP3 music player, currently costing $149 with 1GB of storage and up to 12 hrs of battery life (playback time),
how much more are you willing to pay for the following features (assuming the look and size does not change)
Improved battery life to 16 hours of playback time
1 2 3 4 5
1. Greater than $50 6% 0% 6% 11% 78% -80.25%
2. $25-$50 6% 0% 17% 28% 50% -65.00%
3. $10-$25 11% 22% 28% 11% 28% -8.75%
4. $5-$10 44% 28% 11% 6% 11% 49.50%
5. Less than $5 61% 17% 11% 0% 11% 62.75%
Improved battery life to 20 hours of playback time
1 2 3 4 5
1. Greater than $50 0% 8% 15% 8% 69% -69.00%
2. $25-$50 0% 15% 15% 62% 8% -43.25%
3. $10-$25 13% 33% 40% 13% 0% 28.00%
4. $5-$10 25% 58% 17% 0% 0% 68.50%
5. Less than $5 69% 15% 0% 0% 15% 65.25%
Improved battery life to 24 hours of playback time
1 2 3 4 5
1. Greater than $50 0% 13% 19% 31% 38% -51.50%
2. $25-$50 19% 25% 13% 31% 13% 1.50%
3. $10-$25 38% 19% 25% 13% 6% 36.50%
4. $5-$10 56% 38% 0% 0% 6% 78.50%
5. Less than $5 88% 6% 0% 0% 6% 86.50%
3GB of extra storage capacity
1 2 3 4 5
1. Greater than $50 0% 18% 12% 24% 47% -51.50%
2. $25-$50 17% 22% 17% 28% 17% -4.50%
3. $10-$25 35% 29% 6% 12% 18% 29.75%
4. $5-$10 71% 12% 6% 0% 12% 68.00%
5. Less than $5 82% 6% 0% 6% 6% 76.00%
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6GB of extra storage capacity
1 2 3 4 5
1. Greater than $50 11% 11% 5% 32% 42% -46.75%
2. $25-$50 32% 11% 21% 5% 32% 4.50%
3. $10-$25 53% 5% 16% 16% 11% 33.75%
4. $5-$10 68% 11% 11% 0% 11% 65.25%
5. Less than $5 83% 6% 6% 6% 0% 83.00%
10GB of additional storage for music
1 2 3 4 5
Very likely Likely Neutral Unlikely Very unlikely
1. Greater than $50 26% 11% 16% 16% 32% -9.75%
2. $25-$50 44% 11% 11% 6% 28% 19.75%
3. $10-$25 56% 6% 17% 11% 11% 41.25%
4. $5-$10 72% 11% 6% 0% 11% 69.25%
5. Less than $5 83% 0% 11% 0% 6% 77.00%
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11 WILLINGNESS TO PAY BACKGROUND FINANCIAL DATA
Estimated Total Mobile, Desktop and Enterprise HDD Vendor Revenue, 2004 (Millions of Dollars)
Mobile
Mobile
Share (%) Desktop
Desktop
Share (%) Enterprise
Enterprise
Share (%) Total
Total
Share
(%)
Seagate 386.0 6.1 3,663.0 29.1 2,110.0 53.3 6,159.0 26.9
Western Digital 16.8 0.3 3,259.4 25.9 0.0 0.0 3,276.2 14.3
Maxtor 0.0 0.0 3,334.1 26.5 462.3 11.7 3,796.4 16.6
HGST 2,602.0 41.3 1,016.0 8.1 593.0 15.0 4,211.0 18.4
Samsung 102.7 1.6 1,184.4 9.4 0.0 0.0 1,287.1 5.6
Toshiba 1,923.0 30.5 0.0 0.0 0.0 0.0 1,923.0 8.4
Fujitsu 1,118.3 17.7 0.0 0.0 796.5 20.1 1,914.8 8.4
Excelstor 0.0 0.0 145.2 1.2 0.0 0.0 145.2 0.6
RioSpring/GS-MagicStor 76.5 1.2 0.0 0.0 0.0 0.0 76.5 0.3
Cornice 79.9 1.3 0.0 0.0 0.0 0.0 79.9 0.3
Total 6,305.2 100.0 12,602.1 100.0 3,961.8 100.0 22,869.1 100.0
Total HDDs Shipped 73,369.3 - 209,236.3 - 22,779.4 - 305,385.0 -
Industry ASP 85.9 - 60.2 - 173.9 - 74.9 -
Source: Gartner Dataquest (February 2005)
Notes: Only Seagate, Maxtor and Western Digital publicly report exact results for their HDD business.
However, no vendor reports exact mobile, desktop and enterprise revenue breakdowns.
Gartner Dataquest has estimated all mobile, desktop and enterprise revenue breakdowns, and has estimated total HDD revenue for
Cornice, Excelstor, Fujitsu, HGST, RioSpring/GS-MagicStor, Samsung and Toshiba.
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