Seagate Technology plans to pay US$1.9bn in stock to acquire Maxtor in a deal that would create a company with 40% to 45% of the hard drive market, and combined annual revenue of more than US$11bn.

Craig Davis regional Marketing Manager of Maxtor in Australia said” The merging of the two operations brings together two storage Companies with a wealth of experience. In Australia Maxtor has a stronger retail precence than Seagate and this an advantage to Seagate”. On the distributor front both Seagate and Maxtor use Ingram Micro and ACA Pacific.

Maxtor’s shares leapt 45.13% to $6.56 on news of the deal, though Seagate’s fell 2.04% to $19.20. Under terms of the agreement, Maxtor shareholders will receive 0.37 shares of Seagate common stock for each Maxtor share. This will give them 16% of the combined company, leaving the remaining 84% in the hands of Maxtor shareholders.

Seagate said the combination will create significant synergies and add 10%-20% to Seagate’s earnings per share after the first full year of combined operations. This will not be until 2007 because Seagate does not expect the agreement to close for at least six to nine months. While it expects to save $300m on expenses a year after the process of integration, $500m has been earmarked for costs, including severance payments.

Seagate CEO Bill Watkins said: “With the increased scale of the combined company, we can reduce overall product costs and provide more innovative products at more competitive prices.” For his part, Maxtor CEO Dr CS Park, who will join the Seagate board, would not be drawn on whether it had discussed a merger with any other vendor, insisting it is committed to the Seagate deal. Maxtor will get a $300m payment if Seagate pulls out of the agreement.

Seagate acknowledged that revenue-attrition will result from the merger as OEMs look for alternative suppliers. However, it said the merged company would still be accretive even if it lost half of Maxtor’s revenue. While Seagate is in good financial health, loss-making Maxtor has seen revenue stagnate. While Seagate spoke encouragingly about the quality of Maxtor’s engineers and its production facilities in China, there is little doubt that most of the cost savings will come from Maxtor’s side.

Seagate said it is sticking to its prediction that revenue in the December quarter will grow 17% to $2.2bn, with earnings per share in the range of $0.53-$0.57. It is also retaining its target of earnings per share of $2 in 2006.

Though Seagate’s acquisition of rival Maxtor means one less hard-drive supplier, system builders say there’s not much to worry about. In fact, the deal may just ensure more quality supply as hard-drive makers work to meet rising demand from the consumer electronics market.  Seagate, the No. 1 provider of hard drives in the

“This will mean less choices for us,” said Doug Phillips, senior director of emerging technologies at Seneca Data, but he noted that Seagate, with its five-year product warranty, has been a primarily supplier along with several other manufacturers. Maxtor drives aren’t used often in Seneca products, he said.

Brian Dexheimer, a Seagate executive vice president who runs the company’s channel operations, said the acquisition was less about acquiring specific technology from Maxtor and more about adding manufacturing capacity, particularly in China, and tapping Maxtor’s retail prowess. Maxtor makes about 60 percent of its own media but buys its heads from other suppliers, he said, adding that Seagate makes most of its own components. Seagate will decide which Maxtor products to keep based on customer input, but Seagate won’t be releasing that information until after the deal closes in about six months, he said.

Seagate will need the new manufacturing assets as consumer electronics makers continue demanding more storage. Dexheimer said the hard-drive industry has been growing at 15 percent for the past three years, while storage products for the consumer electronics segment has been growing at 60 percent for the past three years.

“The growth is where it traditionally hasn’t been before, and we are being asked to make different types of products in these spaces,” Dexheimer said.

Todd Swank, director of marketing at Nor-Tech,based system builder, said he has seen no shortages resulting from the growing demand by consumer electronics manufacturers but added that advances in technology will increase pressure for products. He said. more manufacturing capability from Seagate, one of Nor-Tech’s main suppliers, would be welcome as consumers start gobbling up digital video recorders and other technology that allows them to store gobs of movies, pictures and music on a various devices.

“Video will be huge demander of digital storage,” Swank said.

Moving forward, Seagate plans to focus more R&D efforts on rugged one-inch drives with high storage capacities, as well as on drives for cars that can withstand high temperatures and drives with security features like full-disk encryption, Dexheimer said.

According to researcher iSuppli, Seagate is the leading manufacturer of hard drives worldwide, with 28.1 percent of the market in the third quarter. Western Digital had 18 percent of the market in the quarter, followed by Hitachi at 15 percent, Maxtor at 13.8 percent, Toshiba at 9.5 percent, Samsung at 7.7 percent and Fujitsu at 6.4 percent.

Maxtor had been suffered significant losses over the past few years. For its third quarter ended Oct. 1, the company reported a net loss of $17 million on revenue of $927 million, compared with a net loss of $95.1 million on sales of $927 million a year earlier. For its fiscal year ended Dec. 25, 2004, Maxtor reported a loss of $182 million on revenue of $3.8 billion, and in 2003 the company generated $103 million in profit on $4 billion in sales.