Western Digital Corp (WDC), STEC, Inc. (STEC): Three Reasons You Should Love This Deal

The Best Of Both Worlds

All the data that flows through the cloud, on e-commerce, and on mobile must be stored, and it is stored on SSDs. Western Digital Corp (NASDAQ:WDC) is one of the two largest hard-disk drive (HDD) companies in the market — with the other being Seagate Technology PLC (NASDAQ:STX) which stores data for PCs, laptops, DVRs, game consoles, and more physical devices.

The HDD and SSD markets both have their positives and negatives. The HDD market produces exceptionally high operating margins but has seen top-line declines due to slumping PC sales. The SSD market is growing rapid, but is ever-evolving and produces very low operating margins.

Western Digital Corp (NASDAQ:WDC) now has the best of both worlds. STEC, Inc. (NASDAQ:STEC) produced revenue of just $140 million over the last 12 months; less than 1% of Western Digital Corp (NASDAQ:WDC)’s business. However, with this acquisition, Western Digital Corp (NASDAQ:WDC) is obtaining their patents, technology, and can incorporate STEC, Inc. (NASDAQ:STEC)’s products into its supply chain; allowing for faster growth and higher margins.

Furthermore, STEC, Inc. (NASDAQ:STEC)’s products are known for endurance, which Lazard Capital’s Edward Parker believes will bode well for Western Digital’s OEM and enterprise clients. With this purchase, Western Digital now has an edge in these segments, and can further expand across the cloud.

It’s All About The Price

It seems as though any cloud play in the market comes with insane metrics and high valuations relative to fundamentals. STEC, Inc. (NASDAQ:STEC) is a company that has seen drastic revenue losses over the last year, as management mishaps and poor execution has plagued its progress. However, this is still a high-growth industry, as other cloud plays trade at 10-15 times sales.

With Western Digital’s acquisition, it was able to purchase the company at just 1.5 times 2013 expected sales. Analysts have already spoken, and have said that Western Digital will have the capabilities to grow STEC, Inc. (NASDAQ:STEC)’s primary business significantly faster than what STEC could achieve alone.

Thus, this is an acquisition that could return gains for Western Digital in a timely fashion. Most likely, this won’t be a lingering acquisition, one that sits on the company’s balance sheet as an overhang.