Given regulatory concerns and a declining business, we wouldn’t expect a huge premium. However, if shares fall further below the low end of our fair value estimate range ($19-$39 per share), a deal becomes even more likely, in our view.
As we see a secular shift in computing consumption from traditional PCs to smaller, mobile devices, we’re also seeing a shift in storage away from volatile-state hard drives (DRAM) to solid-state drives (SSDs). Even some of the traditional DRAM business is getting replaced by SSD due to its greater efficiency and lower power costs.
Nevertheless, both of the industry’s heavyweights, Seagate Technology PLC (NASDAQ:STX) and Western Digital Corp. (NASDAQ:WDC) trade at fairly reasonable forward earnings multiples, and both firms generate strong free cash flow (though capital allocation decisions differ between the two). Seagate prefers returning much of its excess free cash flow via repurchases and dividends, while Western Digital has maintained a higher cash balance and lower levels of leverage.
Seagate has been taken private in the past, but due to its less-leveraged balance sheet, Western Digital looks as though it’s a more likely candidate to be taken private, in our view. Samsung has an enormous stake in Seagate that could make it command a higher bid, while Western Digital does not have the same constraint.
Yet, we could see the two rivals consolidate as the outlook for the DRAM market continues to deteriorate and antitrust concerns dissipate. A deal would lead to tremendous cost savings and superior pricing power, resulting in a more profitable and valuable enterprise. Still, we’d wait to see if more downward pressure on shares of either company surfaces before becoming interested in the risk/reward without a buyout offer.