Western Digital (WDC) May Soon Be Completely Reliant on Teradyne (TER) for Testing Equipment (STX) (XRTX)

December 23, 2013 12:53 PM EST
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Seagate Technology (Nasdaq: STX) and Xyratex Ltd (Nasdaq: XRTX) announced Monday that they have entered into a definitive agreement under which Seagate will acquire all outstanding shares of Xyratex in an all-cash transaction valued at $13.25 per.

Commenting on the deal, Deutsche Bank analyst Sherri Scribner said, "Testing remains an important capital investment for HDD companies, as the increasing average capacity of HDDs requires longer testing times, and thus an investment in more equipment each year. Currently two companies, Xyratex and Teradyne (NYSE: TER), provide test equipment to the HDD industry. Our understanding is that Seagate was a significant portion of Xyratex’s sales, but not all. The acquisition raises the question as to what Western Digital will do in testing. Seagate has indicated that it will continue to sell test equipment to competitors, but typically HDD companies have disengaged from suppliers when they were acquired by a competitor. If this happens, Western Digital (Nasdaq: WDC) and Toshiba will be completely reliant on Teradyne for testing equipment."

"While we are curious to see how the testing market changes as a result of the deal, in our view, the more interesting move by Seagate is to move further up the stack into storage system subassemblies. By acquiring Xyratex, Seagate gains subassembly knowledge and the ability to gain more wallet share with OEM customers. In addition, the move strengthens Seagate’s position with cloud providers, as it gives the company a broader portfolio of offerings beyond just HDDs. In our mind, this move is similar to Seagate's purchase of LaCie in 2012, where the company moved further up the external HDD stack. We are positive on the deal, as we believe it offers Seagate the ability to increase its TAM, but remains within the company’s core competencies," added the analyst.

Deutsche Bank has a Buy rating on Seagate Technology (NASDAQ: STX) with a price target of $57.00

For an analyst ratings summary and ratings history on Seagate Technology click here. For more ratings news on Seagate Technology click here.

Shares of Seagate Technology closed at $55.66 yesterday.

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