Western Digital (WDC) Purchase of sTec (STEC) is Positive, But Risks Loom - Lazard

Western Digital Corp. (Nasdaq: WDC) shares are lower amid an earlier announcement that it would buy sTec (Nasdaq: STEC) for net $200 million.

Lazard Capital's Edward Parker is cautiously positive on the announcement. He notes that sTec has a differentiated product and NAND intellectual property portfolio, which should let Western Digital compete more effectively in a high-margin, high barrier-to-entry market. "Challenges associated with smaller geometry NAND are exacerbated in enterprise workloads, which require significantly more performance and endurance than consumer applications," said Parker. "Based on published specs, sTec's products carry endurance ratings that are best in class."

Western Digital's strong OEM credibility and world-class distrubiton should allow the company to fully-leverage sTec's product and patent portfolio.

Valuation on the deal is about 1.5 times expected 2013 sales. Parker notes, "Revenue-based valuation is less telling in this circumstance, as better execution should have resulted in a much high revenue base given the strength of products and the growth in the market. Anobit, Pliant, and Sandforce, all companies with strong NAND IP, went for $300 million+ all on a lower revenue base."

Risks with sTec include potential legal costs associated with outgoing CEO Manouch Moshayedi and potential loss of talent to competitors.

Lazard has Western Digital at Buy with $68 price target.

For an analyst ratings summary and ratings history on Western Digital Corp. click here. For more ratings news on Western Digital Corp. click here.

Shares of Western Digital Corp. closed at $60.19 yesterday.

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