Hitachi may be negotiating to sell up to 50 percent of its hard disk drive (HDD) subsidiary to Silver Lake Partners, a private equity fund, according to a report in the Nikkei business daily.
The report said Silver Lake had been granted priority negotiation rights in any sale of all or part of the business and that a deal would hopefully be concluded by January, 2008.
In a statement to the Tokyo stock exchange Hitachi said that it was: "considering, and has taken, various steps to turn around the business, but no decision has been made on the sale of the business." It was considering all options.
Rumours of a sale surfaced in September. Then Hitachi was said to be talking through Merrill Lynch to various private equity funds.
The various reports suggest that Hitachi GST is looking for a Silver Lake to buy in to GST and help turn the unit around. Hitachi could use the investment funds to re-energise the subsidiary, bringing in outside management as well. Or it could look at a joint-venture with another HDD supplier.
Hitachi bought IBM's disk drive manufacturing business in 2002 for $2 billion, and formed its Global Storage Technologies (GST) unit around that and its own HDD unit. GST reportedly had a 16 percent market share of the world-wide hard drive business in 2006 and has made cumulative losses of slightly more than $1 billion.
In October this year Hitachi said it expected an operating loss from the GST unit of $325 million, the fifth annual loss in a row. In other words it spent $2 billion in 2005 and has since lost half of that sum instead of making money on the deal.
What is half of a failing HDD business worth? Its technological prowess is good and product quality high. Its annual revenues are running at over $5 billion presently ($640 million yen). Negotiations could be hard but Hitachi is in the weaker position as it needs the money. It is understood that a sum between $250-500 million is under discussion.
As has been pointed out often the global HDD business is still consolidating, Seagate having bought Maxtor recently. The 1-inch microdrive business has effectively been ended by flash memory drives and that technology is being used in both the 1.8-inch and 2.5-inch disk drive sectors as well, adding to the intense price competition in the industry.
HDD manufacturers have to keep on ramping up capacity to keep a cost/GB advantage over the oncoming flash memory technology and to try and develop the use of disks to store rarely-needed files that would previously have been stored on tape.
At the same time green concerns over storage electricity usage are encouraging the use of technologies such as de-duplication which radically increases the amount of data that can be held on disk, to the detriment of disk unit sales, and also stimulating a halt in the decline of tape drive sales.
Disk technology optimists point to second-generation perpendicular recording technology and the expected HAMR (heat-assisted magnetic recording) technologies as keeping up the momentum in drive capacity increases. Hitachi has been leading by example here with its terabyte capacity 3.5-inch drive.
Pessimists suggest that HAMR media may be much too expensive and that the cost/GB of flash memory will cross over that of disk in a very few years.
They say that the short write life problem of flash media will be overcome and that, consequently, flash drives will make significant inroads into data centres by 2010.
A vital aspect of keeping HDD cost/GB down lies in manufacturing efficiencies, and that means volume. Hitachi GST has too small a share of any one disk drive market to enjoy the manufacturing economies of scale enjoyed by, for example, market leader Seagate.
One option must be the formation of a joint-venture with a second or third-tier HDD manufacturing to drive manufacturing volume in a market segment with potential. Western Digital, Fujitsu and Samsung could be candidates in such a joint-venture.
Techworld reported that Hitachi was facing up to problems with its HGST subsidiary in November 2005 and, even then, considering the long term future of the business.
Recently Hitachi has been cutting costs at the GST subsidiary. It is reducing headcount by 11 percent, 4,500 workers, and closing factories in Mexico and Japan.
Hitachi has also settled law suits with Samsung concerning HDD patents. There is now a licensing arrangement between Samsung Electronics Co. and Hitachi GST. GST sued Samsung a year ago and Samsung replied in kind with its own suit in March this year. Now Hitachi has made what many will perceive as a somewhat humiliating climb down. The settlement does however clear the decks and removes an element of uncertainty from the GST business.