Q&A: Seagate CEO talks about the Maxtor acquisition

In a surprise move, Seagate Technology announced that it has struck a deal to purchase its chief competitor in the hard disk drive manufacturing market, Maxtor Corp. Bill Watkins, president and CEO of Seagate Technology, spoke with Computerworld after the $1.9 billion deal was announced about what technology Maxtor brings to the table and what the merger will mean for both companies. (Techworld wrote about this here.)

LM: Will this result in layoffs at Maxtor and Seagate? Yes.
BW: Layoffs at both companies or just at Maxtor? You could make the argument it might be more on their side. But it’s too early for us to tell you who’s going to go.

LM: What does Maxtor bring to the table considering this is a company that has been losing money?
BW: After doing due diligence, [we found] they’re in better shape than most people realize. Historically, when deals have been done in this industry, people have gone out to acquire some sort of product road map, technology or specific business. This is not what this is about. We’re very comfortable with our product road map and very comfortable with our manufacturing and platforms and strategy. This is really about bringing over the Maxtor revenue and leveraging it through our infrastructure. We get tremendous scale of value from that.

On the gross margin side, as we layer this revenue over our fixed cost, we get an efficiency there. If you look at the [operating expenditures], we believe in the combined company we can eliminate about $300 million in expense, getting tremendous leverage out of our engineering resources. One way to think about this is, in a sense, we’re buying revenue and leveraging it through our operating matrix.

LM: Where will this $300 million in savings come from?
BW: I believe I can run the combined company with about 25 percent more spending than I currently do at Seagate.

LM: When do you expect to see this deal close?
BW: I think it’s going to be in the second half of calendar year 2006. I expect six to nine months.

LM: What other value is there in this deal?
BW: There are some assets we think are valuable over there. Their China facilities, their media facilities we feel are both state of the art and are capable of going forward with perpendicular [recording technology]. We believe they have a very good brand in that space. I think from an additional engineering resources perspective, they have some good people that we can bring on.

LM: You’re already developing perpendicular technology. How does Maxtor bring that to the table for you?
BW: They don’t. We take their facilities, put our infrastructure in there and manufacture to their customer base - in what will become our customer base now. They utilize a lot of the same equipment we do, but they’re more capable in making perpendicular media. We obviously think we can add some technology to that.

LM: From a technology perspective, what do they bring?
BW: I think they have good engineers in enterprise and desktop. We want to design products to our platforms, to our components, etc. The resources will allow us to increase our investment in fundamental technology, but our plan is to use Seagate’s technology road map. This is not going to be a major product innovation. They have some engineering we’re very interested in. I think their enterprise engineering is very good. They have some good engineers in Longmont, [Colo.] and Milpitas [Calif.] As a resource, I look at this as just more good people to add to us.

LM: Does that mean Maxtor’s road map now gets curtailed?
BW: Well, they have to operate as an independent company between now and closure. But, we obviously - to the degree that there’s something in their road map that's significant - we’d use it. Our current thinking is we feel very comfortable with where Seagate is and the leadership Seagate has.

LM: How is this deal going to boost your sales?
BW: We use the same technology for all our products. Any volume or revenue I add to this fixed cost comes in on the margin at a much higher gross margin for us. So it becomes a highly synergistic, leveraged proposition for me. Every additional drive I make is a whole lot cheaper than our first one.

LM: What about overlap? There’s a lot of overlap. Don’t you think that will hurt earnings?
BW: We’ll get rid of that and leverage that across an efficient manufacturing and engineering platform.