IBM Corp. and Hitachi Ltd. are to pool their hard disk drive businesses into a company majority owned by Hitachi. Lackluster results in IBM's hard disk drive (HDD) business and a belief that other sectors of the storage industry offer better growth opportunities led IBM to the deal, it said.
Tokyo's Hitachi will pay IBM for a 70 percent stake in the yet-to-be-formed company under the deal announced Wednesday. The new company will be based in San Jose, California, and draw its chief executive officer from Hitachi.
Other details, including the size of the payment, are yet to be announced, representatives of the companies said. According to a Wall Street Journal report, the payment is expected to exceed US$1 billion.
The two companies hope the new joint venture will achieve annual revenue of between ¥500 billion and ¥600 billion (US$3.8 billion and $4.6 billion).
"It's meaningless to keep the business unless we become the top vendor," said Etsuhiko Shoyama, president of Hitachi at a Tokyo 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 disk drive business by IBM, which has been hit by increased competition, higher development costs and lower demand in recent years. The Armonk, New York, company has seen growth in sales of hard disk drives to other manufacturers from its OEM (original equipment manufacturer) business in only two of the last 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 chief executive officer of IBM Japan Ltd. in Tokyo.
The company is due to report results for the first quarter of 2002 later Wednesday.
Last week, looking ahead to the announcement, Chief Financial Officer John Joyce did not mention the hard disk business specifically, but noted that overall, "we saw across-the-board weakness in revenues in the first quarter, particularly in our OEM technology business." He added the company expects to see revenue at its technology group fall by around 35 percent and the unit report a pretax loss of around $200 million.
An analyst said the hard disk 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, 1 plus 1 can't be 2. 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-inch enterprise hard disk market. Unlike the 2.5-inch 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-inch Fibre Channel and SCSI disk drives, Hitachi has a small (market) share, and that is mainly for their own disk array, and IBM has been struggling with their enterprise hard disk drive business. Each has good experience in engineering and the new company should be able to leverage this ability into new technology," Suzuki said.
Wednesday's 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 estimates that there are 43 billion billion bytes (43 exabytes) of data in storage now, one 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 on a group basis rather than unit by unit, Otoshi said. Their collaboration will include also include research and development into interface standards, and 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 (redundant array of independent disks) 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 CIM (Common Information Model) and virtualization, we will to be the global number one (in RAID storage systems)."
Shoyama sees EMC Corp. as Hitachi's competitor in RAID.
This is not Hitachi's first move in the storage networks sector. In November last year the company joined investors including the Intel Communications Fund in investing in DataCore Software Corp., which develops storage virtualization and networking software.