Hitachi Ltd <6501.T>
Bankers are in discussions with the Japanese company about an IPO, and underwriters could be named in early September, the sources said. Unofficially, Goldman Sachs
The hard-drive unit, Hitachi Global Storage Technologies (HGST), is the world's No. 3 hard drive maker.
Although an IPO is the most likely scenario, Hitachi is also considering a sale of all or part of HGST, several sources said.
Banks earlier this month gave presentations to HGST in San Jose, California, where the unit is based, one source said. Another said bank teams had also traveled to Japan.
Last month, in an unusual move not tied to any event except the end of a financial quarter for HGST, Hitachi emailed analysts and fund managers an investor package highlighting the strengths of the unit.
Analysts said Hitachi may be looking to an IPO or sale to generate cash.
A sale might be a more attractive option, given the struggling U.S. IPO market and a sudden surge in tech-related M&A activity. Bankers have said more companies are now pursuing both options simultaneously.
An independent business structure is ideal for a business like this one where price volatility is so severe and there is the need for such big capital investment, said a Hitachi executive who declined to be named.
A Tokyo-based Hitachi spokesman said, We have not made any decision on the future (of HGST). Our stance from before -- that we have been exploring various possibilities for the direction of the business -- has not changed.
The company declined to comment further.
Hitachi last year moved to raise about $4.5 billion to shore up its battered capital base by issuing new shares and convertible bonds, its first public offering in 27 years.
The company, on track for its first annual net profit in five years, has boosted investment in infrastructure-related areas such as power and industrial systems.
Some analysts have said hard drive manufacturing may fall outside that mandate and that shedding the business could help the company's overall finances.
They are sort of cash-strapped, so this would get money to the firm, it would help them financially, said Hemant Hebbar, an analyst with Wedbush Securities.
Wedbush said in a research note on August 3 that Hitachi might be planning to spin out HGST through an IPO within the next two years.
The outlook for the hard disk drive industry is uncertain, with PC demand seen weaker than previously expected, especially among consumers in mature markets. Intel Corp
HGST turned profitable in 2008 for the first time since it was founded in 2003, after Hitachi bought IBM's hard disk drive operations.
HGST posted an operating profit of $186 million on revenue of $1.5 billion for the 2010 second quarter.
Noble Financial Group analyst Mark Miller said some of HGST's business decisions in the quarter -- including boosting production in a tight market -- could be viewed as an attempt to gain market share and prepare for a spinoff.
The thing investors may be overlooking is that maybe Hitachi did this to make (HGST) results look good for an IPO rollout, Miller said.
But HGST's high output led to lower hard drive prices for the overall industry and could end up hurting HGST's valuation. Analysts noted that rivals Seagate Technology
Weak markets have depressed valuations and spurred increased M&A activity. Miller said there had been speculation in recent months that Web giant Google Inc
In 2007, when HGST was mired in losses, Hitachi looked into selling a stake in the unit to investment funds such as U.S. private equity firm Silver Lake, according to sources. The Japanese parent decided not to pursue the deal when HGST started turning a profit.
Hitachi President Hiroaki Nakanishi, who was then heading HGST, announced afterward that HGST would rebuild on its own, but that he would not rule out one day receiving outside capital for the unit.
HGST is currently led by President and Chief Executive Officer Steve Milligan, who previously was chief financial officer for Western Digital.
(Reporting by Alex Dobuzinskis in Los Angeles and Emi Emoto in Tokyo; Additional reporting by Clare Baldwin and Ritsuko Ando in New York and Kentaro Hamada, Sachi Izumi and Taro Fuse in Tokyo; editing by John Wallace)