Editor’s Note: Following the release of Seagate’s earnings for the fiscal fourth quarter and fiscal year 2012, as well as statements made in the Investors Call, we’ve posted a followup. Even with the changed timings, our sources have proven reliable in the past, and with both companies being in silent period – we all will have to wait and see if OCZ can get their targeted price.
The rumors that OCZ Technology is being acquired by Seagate raised quite the steam last week, sending the stock soaring up. We can now report that according to sources close to heart of the matter, ‘the deal is done’.
Leadership of Seagate Technology did not enjoy the past 18 months or so. The company tried to go private in an effort lead by TPG Capital and their partners, but failing to acquire SandForce and more importantly, failure to understand the intricacies and the importance of Solid State storage lead to more than one backer leaving the privatization bid. We exclusively reported about the matter here, and the company admitted they’re not going private in a statement released in following weeks.
The company also suffered through departures of people that used to be the public face of the company, potentially eroding the relationships with the media and not understanding the full impact of social media engagements. At the same time, Western Digital Corporation, their primary competitor – acquired HGST (Hitachi Global Storage Technologies). As a consequence, the company just reported record revenue and net income, regardless of natural disaster in October 2011 that crippled 60% of its capacity. Western Digital now is rushing into building plants in countries such as China in order not to be overly reliant on a single location.
On the other hand, OCZ Technology enjoyed quite the turbulent ride, continuously morphing its business model in order to achieve higher revenue. This maker never feared to innovate, even though some of their products had alarmingly high failure rates. OCZ went from DRAM and graphics card maker (a short lived project) into creating a market segment called the enthusiasts. Even though the vast majority investors and the Wall Street firms as such haven’t got a clue about the enthusiast market, companies such as OCZ, Corsair, Patriot Memory, Mushkin, GeIL, G.Skill, Thermaltake, Cooler Master etc. all grew from companies with tens of employees into companies with hundreds of employees and more importantly, multi-hundred million dollar revenues.
A very good example how OCZ got the most money for the buck was the acquisition of flat business called PC Power & Cooling e.g. PP&C. The company was known as the maker of finest power supplies on the planet, but did not push for marketing at all. When we met the company executives, though – we were shown for example, power supplies for subsystems on nuclear submarines. Thus, when OCZ came into enterprise market with their PCI Express-based Z-Drives, the company already was fully compliant with the GAO regulations (Government Accountability Office) and was able to bid on tenders immediately. In fact, one of our sources close to the heart of the company said that was one of, if not the major reason why OCZ wanted to acquire a competitor (OCZ sold its own power supplies at the time, and still does to this date). We disagree with that view, and consider that OCZ needed both brain and manpower to cope with its own power supplies (RMAs, i.e. warranties) and to improve on its own designs.
But building on the ‘power supplies for the U.S. Army’ story, we learned about quite a few of deals in the B2G/B2M, which helped OCZ to drive the innovation into the enterprise segment. On the consumer side, OCZ was always known as maker of fast, but corruptible products (3-5% return rate). Yet, the supreme customer service catered to enthusiasts in a way that old failed memory modules (OCZ exited the market in 2010) and SSD (Vertex 2 being a good example), replacing those products with the brand new ones.
As a result, OCZ had exceptionally high recognition rate and customers that understood the importance of redundancy. Furthermore, the company invested heavily in acquisition of brainpower from PLX and acquired Indilinx, maker of BigFoot SSD controllers. Unfortunately, for every major R&D investment, especially tapeouts (sending the chip blue print to the foundry) is a major cash drain on the company.
Even though the enterprise market was hesitant to accept the maker of PCIe-based drives (utilizing cheap MLC NAND Flash), the economy of scale worked in the company favor. Enter Seagate. The company had quite a bit of failure in the Solid State Storage segment, with Pulsar and Pulsar.2 drives. Maker of otherwise excellent products such as for example, line of external drives which are easily upgraded with different interfaces (USB 2.0, USB 3.0, FireWire, Thunderbolt) or ultra-fast and reliable enterprise hard drives (Cheetah, Constellation) and the market leader in capacity (first to 3TB and 4TB hard drives) or heavy investment on the software side, enabling you to backup Facebook of Flickr (try to find software other than the Seagate Dashboard Agent – good luck not finding a malware app).
Thus, OCZ was pressured by investors, since the company was gung ho on buying market share (fiscal first quarter 2013 i.e. Q2 2012) yielded in a increased revenue to the tune of $113.6 million, just short of revenue which it had achieved in whole of 2008 ($144 million). The company went from being a 150 million dollar a year to a potentially $630-700 million revenue company in just four years time. OCZ also drove the price of consumer drives to 60-cent-a-gigabyte, losing money in the short run to gain market share. While 630-700 million will still be short of 800 million dollar revenue achieved by its ‘arch-rival’ Corsair Components Inc., or behind the industry leaders ADATA and Kingston Technology (2010 revenue: $6.48 billion). However, all that OCZ has to show are solid state drives (in different formats) and power supplies, while their competitors have a lot of color in their product segments.
While our sources and OCZ’s public stance always insisted they wanted to remain independent, in the quarter we mentioned above, the company burned almost 50% of the recent $108 million financing round (in February 2012, the company sold 12 million shares at $9). This lead to stock being quite volatile, and in the first half of the year, OCZ started to negotiate its exit strategy. With a strong partner, be that Seagate, Western Digital or Micron Technology (the latter two were a pipe dream, since they both have retail and commercial SSD subsidiaries – Micron runs Crucial), they could continue to burn through $10-40 million a quarter and gain market share to the point of domination (Intel, Crucial/Micron, Corsair, Patriot and Kingston are realistic competitors in consumer, Fusion-io and STEC compete in the enterprise).
According to our sources, the negotiations heated up in April 2012, with the final deal and the cancelation of OCZ’s next-week roadshow lead to only logic conclusion by our sources and our own investigation. The conclusion is that Seagate will keep true to its tradition and announce the acquisition with its own quarterly results, scheduled for July 30, 2012. We expect a mix of cash (Seagate has over $1.7 billion in free cash flow) and stock, with the overall value of the deal confirming the rumors on the street, exceeding $1 billion in value. One of our reliable sources stated that the value of deal should be to the tune of $1.14 billion, pending the closure of trading on Monday, July 30th.
As always, this could end up being a rumor and our multiple sources could end up being wrong. However, where there’s smoke, there’s fire.
The author of this article does not own stock of the companies he reports about. His focuses are computing technologies. The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information.