IBM to consolidate hard drive business with Hitachi

IBM and Hitachi Ltd. will pool their hard disk drive businesses into a company that will be majority owned by Hitachi. Lackluster results in IBM's HDD business and a belief that other sectors of the storage industry offer better growth opportunities led IBM to the deal, the company said in a statement yesterday.

Tokyo-based Hitachi will pay IBM for a 70% stake in the yet-to-be-formed company under the deal announced today. The new company will be based in San Jose and will draw its CEO from Hitachi.

Other details, including the size of the payment, haven't been announced. According to a report in The Wall Street Journal, the payment is expected to exceed $1 billion.

The two companies said they hope the joint venture will achieve annual revenue of $3.8 billion to $4.6 billion.

"It's meaningless to keep the business unless we become the top vendor," Etsuhiko Shoyama, president of Hitachi, said at a news conference. "We expect this tie-up will hold the leading position in the market."

The move amounts to a partial withdrawal from the hard drive business by IBM, which has been hit by increased competition, higher development costs and lower demand in recent years. The company has seen growth in sales of hard drives to other manufacturers from its reseller business in only two of the past eight quarters.

"With this joint venture, we will try to survive in the HDD business by becoming a market leader," said Takuma Otoshi, president and CEO of IBM Japan Ltd. in Tokyo.

The company is due to report its first-quarter results later today.

Chief Financial Officer John Joyce said last week that he didn't specifically mention the hard drive business but noted that overall, "we saw across-the-board weakness in revenues in the first quarter, particularly in our [reseller] technology business." He added that the company expects to see revenue at its technology group fall by around 35% and the unit report a pretax loss of around $200 million.

An analyst said the hard drive deal is good for each company. "In terms of scale, it will help each vendor," said Masaki Suzuki, a senior analyst at Gartner Japan Ltd. "But, like many mergers or integrations, one plus one can't be two. Maybe in the process, both companies may try hard to make the organization effective and competitive, and that could be a challenge for them."

The alliance has the most potential to help the companies in the 3.5-in. enterprise hard disk market. Unlike the 2.5-in. disk market, where IBM holds a leading position and Hitachi is a few positions below, both companies have much room for improvement, Suzuki said.

"In the enterprise market for 3.5-in. Fibre Channel and SCSI disk drives, Hitachi has a small [market] share ... and IBM has been struggling with their enterprise hard disk drive business," Suzuki said. "Each has good experience in engineering, and the new company should be able to leverage this ability into new technology."

The deal was accompanied by a second agreement under which the two companies will work together to develop new storage networks and systems.

By 2005, there will be 13 times more data stored than today, IBM's Otoshi said. He estimated that there are 43 exabytes (43 billion billion bytes) of data in storage now, a third of them on individual PCs. "As computers' networking technologies spread, how to store data will be a big issue in the near future," he said.

The companies will work together on virtualization technology, which allows a system administrator to control and manage storage systems by groups rather than unit by unit, Otoshi said. Their collaboration will also include research and development into interface standards, as well as new storage technologies that are interoperable and based on open standards, he said.

"The reason for this tie-up is simply because we want to develop RAID technologies efficiently," said Hitachi's Shoyama. "But at some point, we expect Hitachi and IBM to compete with each other in the future. By jointly developing [Common Information Model] and virtualization, we will to be the global No. 1 [in RAID storage systems]."

Shoyama said Hopkinton, Mass.-based EMC Corp. is Hitachi's competitor in RAID.

This isn't Hitachi's first move in the storage networks sector. In November, the company joined investors, including the Intel Communications Fund, in investing in Fort Lauderdale, Fla.-based DataCore Software Corp., which develops storage virtualization and networking software.

Kuriko Miyake in Tokyo contributed to this report.

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