Western Digital Corp (WDC), STEC, Inc. (STEC): What This Acquisition Means for Competitors

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STEC’s recent troubles have created a tremendous opportunity for Western Digital: A few years ago, the California-based drive-maker probably would have paid several times more for the property. It is likely that the larger company will use STEC’s operational expertise to buff out its server businesses and create synergies that could create significant cost savings. Since Western Digital is already regarded as a leader in the solid-state industry, this acquisition could make things more difficult for big-name competitors like Seagate.

Legal Issues and Complications

Western Digital’s planned acquisition still faces some hurdles. Despite offering to double STEC’s pre-announcement market cap, the company has faced criticism from investors and market-watchers who believe that its offer undervalues its smaller rival. Several law firms have begun to investigate the terms of the deal and the maneuvers that preceded it. Although it is too early to tell for sure whether these investigations will affect the merger’s outcome, investors should keep one eye on the proceedings and await the results of a shareholder-approval vote that will take place later this year.

Effects on the Competition and Potential Plays

Assuming that the deal goes through as planned, Western Digital’s solid-state competitors will feel a renewed sense of urgency. Seagate Technology PLC (NASDAQ:STX) and other firms like Fusion-IO, Inc. (NYSE:FIO) have made it clear that they wish to grow by acquiring smaller drive-makers that operate in the space. Although Western Digital has removed a prime target from the marketplace, it is likely that the broader hard drive ecosystem will see additional mergers and acquisitions in the near future. For now, Western Digital will enjoy an attractive competitive advantage.

In sum, investors who recognize the changing realities of the hard drive market would do well to look at this acquisition. For short-term traders, STEC continues to offer a meaningful arbitrage premium. Long-term investors can find plenty of value in a post-deal Western Digital. Taken as a whole, this deal could be a win-win situation for all involved parties.

Mike Thiessen has long position in Seagate. The Motley Fool owns shares of Western Digital. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article What This Acquisition Means for Competitors originally appeared on Fool.com is written by Mike Thiessen.

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