Western Digital (NYSE:WDC) said it agreed to buy Hitachi, Ltd.'s (NYSE:HIT) Global Storage Technologies unit for $4.3 billion in a cash and stock deal that would create one of the world's leading hard disk drive maker.

Why It Matters

The deal is seen as what would be the beginning of the consolidation of the hard disk drive (HDD) sector, which is facing lower demand in the midst of strong sales of tablet PCs like iPad that don't use hard drives for storage.

The combination of weak PC demand and industry overcapacity are likely to persist in the near-term, making future free cash flow (FCF) at the HDD players highly uncertain.

Western Digital had already tried to buy rival Seagate Technology Plc (NASDAQ: STX) and was refused amid concerns the deal would have faced antitrust concerns, the Bloomberg reported in December citing people familiar with the matter.

In November, Seagate said it has terminated discussions with private equity (PE) firms regarding a going private transaction, as the two parties could not agree to a valuation range. Reports from Bloomberg said private equity firms TPG, Kohlberg Kravis Roberts and Bain Capital are among those interested for the hard disk drive maker.

Western Digital-Hitachi GST Deal

California-based Western Digital will pay Hitachi Global Storage Technologies (Hitachi GST) $3.5 billion in cash and 25 million in common stock, which was valued at $750 million based on Western Digital's closing stock price on March 4.

As a result, Hitachi, Ltd. will own about 10 percent of Western Digital shares and have two seats on Western Digital's board.  

Western Digital, which plans to fund the deal with existing cash and total debt of about $2.5 billion, expects the deal to be immediately accretive to its earnings per share on a non-GAAP basis that excludes acquisition-related costs, restructuring charges and amortization of intangibles.

Upon the completion of the deal, Steve Milligan, president and chief executive officer of Hitachi GST, will join Western Digital as president, reporting to Western Digital's chief executive John Coyne.

The deal is expected to close during the third calendar quarter of 2011, subject to customary closing conditions, including regulatory approvals.

We believe this step will result in several key benefits-enhanced R&D capabilities, innovation and expansion of a rich product portfolio, comprehensive market coverage and scale that will enhance our cost structure and ability to compete in a dynamic marketplace, John Coyne said in a statement.

Related to the deal, Bank of America Merrill Lynch gave financial advice to Western Digital, while Goldman, Sachs & Co was the financial adviser to Hitachi, Ltd. and Hitachi GST.

Western Digital, Seagate Shares Jump on Deal

The deal boosted shares of peers Seagate Technology and Quantum Corp. (NYSE: QTM).

Shares of Western Digital jumped about 16 percent, or $4.70, to $34.71 in the Monday's morning trade on the NYSE. Seagate shares soared 11 percent, or $1.39, to $13.83 on the NYSE 

Quantum Corp. shares surged 3.95 percent, or 10 cents, to $2.63 on the NYSE.