Japan's Toshiba Corp (6502.T) said it is in talks to buy Fujitsu Ltd's (6702.T) hard-disk drive business, a deal that would create the world's largest maker of small hard drives and is reportedly worth $340-$450 million, reported Reuters.
Shares of Toshiba and Fujitsu surged more than 5 percent on the news as analysts said the deal would be positive for both companies, though the outlook still looks tough as the global economic slowdown hurts demand for personal computers.
Toshiba sees hard-disk drives as a growth business, while Fujitsu has been exploring ways to turn around its loss-making HDD operations and concentrate on its IT consulting business.
Fujitsu's talks with U.S. rival Western Digital (WDC.N) to sell its HDD business were reported to have fallen through late last year. Fujitsu spokesman Etsuro Yamada said the company was in talks with multiple parties about the future of its HDD operations, including a possible sale or alliances.
"Size matters in the hard-drive business, and Toshiba would be able to benefit from being the biggest maker of 2.5-inch drives," said Mitsubishi UFJ Securities analyst Yukihiko Shimada.
"If the deal goes through, it would also be able to seek synergies with NAND, SSD and server-use devices," he said.
Toshiba, the world's No. 2 maker of NAND flash memory after Samsung Electronics (005930.KS), has bet heavily on NAND-based solid state drive (SSD) memory devices, seen as a promising alternative to some hard-disk drives because they consume less energy.
But even as the SSD market grows, demand for hard-disk drives is expected to increase, especially for smaller ones, because SSD and HDD are used for different applications and flash memory-based drives are still more costly.
Both Toshiba and Fujitsu focus on 2.5-inch drives that are used mainly in laptops, and the combination of their HDD operations would give Toshiba a one-third share in the global market of such devices, putting it ahead of Hitachi Ltd (6501.T) and Western Digital.
Analysts say Fujitsu has lacked cost competitiveness and has fallen behind rivals in new product launches, while Toshiba would be able to cut unit costs by expanding its business. The 2.5-inch drives are used in other electronics products such as car navigation systems.
Toshiba spokesman Keisuke Ohmori confirmed an earlier report by the Nikkei business daily that the company is in talks to buy Fujitsu's HDD business but declined further comment as the talks are ongoing.
The Nikkei said a deal between Fujitsu and Toshiba would likely be worth 30-40 billion yen ($340-$450 million), adding that it would be announced at the end of the month if the heads of the two companies come to an agreement at a meeting this week.
Tatsuya Mizuno, a director at Fitch Ratings, said it makes sense that Toshiba wants to buy Fujitsu's hard-disk drive business and use their larger scale to lower costs, but warned it could still be difficult to boost profits amid weak demand and falling prices.
"It is not as simple as all going well because of a bigger scale," he said. "Prices are quite volatile in this sector, and it is hard to generate profits consistently."