sTec Buyout Is Just the Beginning


Editor's note: In a previous version of this article, it was incorrectly stated that former CEO Manouch Moshayedi was found guilty of insider trading. Moshayedi's case is still pending. The Fool regrets the error.

Though it traded slightly down in an ultra-volatile market on Monday, hard drive manufacturer Western Digital made a smart move in its $340 million acquisition of SSD-maker sTec . The purchase gives Western Digital a firm position in the solid-state memory playing field and should ease analyst fears regarding the company's ability to grow in a post-PC world. On a more macro level, the move signals what may be a period of consolidation in the industry, with the bigger, older players snapping up the smaller, tech-forward companies.

The deal
Western Digital paid a 91% premium to Friday's closing price for sTec. That may sound like a hefty price to pay for the company, which has suffered multiple management snafus in recent years, but the price tag was actually very attractive.

Net of sTec's cash hoard, Western Digital is paying $207 million for the company. sTec has been one the most attractively valued players in the space, though much of it is due to management issues. The company has had activist interest from some time, with Balch Hill Capital calling for new directors and a management shakeup. Last year, sTec's founder and CEO came under investigation for insider trading, prompting his brother to take over the chief executive role. The new boss has attempted to turn around declining cash flows despite a growing business, but has yet to be too successful. It's yet unclear whether the company will retain current management or not.

Western Digital is the first to strike, beating competitor Seagate to the punch for a stronghold in solid-state drives.

What it means
The ridiculously oversold "death of the PC" chant has created headaches for both Western Digital and Seagate. Both companies generate substantial amounts of free cash flow and have rewarded shareholders with smart buybacks and dividends. In the meantime, they have been methodically (if too slow for Wall Street) building out SSD and cloud-focused operations. Western Digital's purchase is perhaps the most high-profile move into the space yet, so perhaps the apocalyptic fears will fade soon.

The move does leave some pressure on Seagate. The company has been public about its quest for an SSD maker, and last July rumors flew that the company would buy OCZ Technology. The deal fell through, but investors can be sure Seagate is likely looking harder now than ever to get its piece of the pie. The company can surely find what it's looking for, but the price tags will soon be rising.

The sTec buyout still needs to be approved, and there is the theoretical opportunity for Seagate to offer a competing bid, but most find that unlikely. However, the big takeaway here is that SSD manufacturers are going to continue their status as objects of desire. Investors in OCZ, Fusion-io,and other players may soon see their stocks rise on rumors of acquisitions.

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