News that Western Digital Corp. (NASDAQ: WDC) and is acquiring STEC Inc. (NASDAQ: STEC) has shares of STEC rising massively on Monday morning. What really matters here is that Western Digital’s move here is for the company to move from personal hard drives and traditional PC hard drives into the growth segment of enterprise solid-state drives. The move is significant as Western Digital and Seagate Technology PLC (NASDAQ: STX) enjoy close to a duopoly when it comes to traditional hard drive systems. In short, this is a move to expand in flash drives.
Western Digital’s HGST subsidiary is the unit making the acquisition for approximately $340 million in cash. STEC shareholders are cleaning up in this buyout because that comes to $6.85 per share in cash, versus a closing price of $3.59 on Friday and a 52-week trading range of $3.31 to $8.39. The transaction represents an enterprise value of $207 million, net of STEC’s cash balances as of March 31, 2013.
The move here is aimed to augment HGST’s existing solid-state storage capabilities and to expand in the rapidly growing area of enterprise solid-state drives (SSDs). Western Digital said that the HGST unit remains committed to joint development program with Intel Corp. (NASDAQ: INTC) and that it plans to continue delivering current and future SAS-based SSD products with Intel.
Western Digital has a market cap of about $14.2 billion and Seagate Technology is worth about $15.1 billion. Because there is so much concern over the market of traditional hard drives, both companies trade at huge discounts to the market at only about eight times expected earnings.
Shares of STEC Inc. (NASDAQ: STEC) are up almost 90% at $6.78 so far on Monday. This might not seem to be enough to move the needle on the surface. If you look beyond the small size here, the move puts Western Digital further along into the future of storage rather than the yesteryear technology of storage. This merger also likely puts pressure on Seagate to consider a similar move, as each company has to protect itself against moves of the other.