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Employee Retention of Maxtor Corporation

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Employee Retention of Maxtor Corporation
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Pratik Kukreja
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Employee Retention of Maxtor Corporation - April 14th, 2011

Maxtor Corporation, founded in 1982 and acquired by Seagate Technology in 2006, was an American manufacturer of computer hard disk drives, the third largest in the world immediately prior to acquisition. It now operates as a subsidiary of Seagate.[1]
Maxtor targeted both the server and desktop market, concentrating on disk capacity more than disk speed for desktops

Retention of Maxtor revenue: Seagate management was quite clear that this is the primary focus, and rightfully so. The company repeated that it believes the deal is beneficial even at 20% revenue retention (approximately $200 million), and several Wall Street analysts assert that Seagate could easily double its bottom line earnings within a year or so. Through the remainder of 2006, Seagate’s earnings will be adversely affected due to normal integration costs and streamlining efforts, so CQ3 and CQ4 financial performance will be affected. It will experience cash costs of approximately $500 million related to restructuring, workforce reduction, and purchase price accounting. Personnel related costs will be less than $250 million, and unspecified but significant non-cash expenses pertaining to plant/equipment will likely be recorded.
Component sourcing strategies: The company will continue to make all its head wafers internally, and that heads and media could be externally sourced to perhaps as much as 15% (on a units basis). Media sourcing will likely be above 20% in the near term, before dropping back to the targeted range. Maxtor’s internal media operation, MMC, will be shifted to an unknown site in Asia beginning in CQ2 ’06. Seagate signaled a change in strategy by indicating a willingness to outsource up to 15% of its heads.
Employee retention: STX will retain 50% of Maxtor’s employees (90% of employees in China and approximately 25% of R&D). For Maxtor staff that is needed for the integration period but for whom there may not be full-time positions, Seagate may retain them for up to six months. Redundancies are expected to be reduced through the balance of 2006.
Segment market shares: Maxtor lost desktop market share in CQ1 ’06, and will see a further reduction in CQ2. Seagate management benchmarked the Maxtor-Quantum merger and its combined loss of market share, and believes that the company can hold better than 40% market share on the desktop. Enterprise share is much less likely to be affected.

Comments, Analysis:
TRENDFOCUS believes that Seagate’s acquisition of Maxtor is good for Seagate and the rest of the industry. Of course, many Maxtor suppliers will be adversely affected, since Seagate is not expected to retain many Maxtor HDD programs past CQ4 ’06. With statements about externally sourcing a minor portion of its heads, Seagate is looking to benchmark its own head technology for the first time (in large quantity terms) in years – but it is unclear whether SAE/TDK or Alp Electric will participate in this plan. Some enterprise programs and Maxtor’s external “One Touch” drives will likely remain, as they augment Seagate’s existing product lines. Management has stated this strategy all along and there is not reason to expect a diversion from the plan.
The company has already begun to outfit Maxtor’s Suzhou, China plant – one of Seagate’s targets in the deal – with its own “factory of the future” automated production lines. The layout of this plant is conducive to a concurrent Seagate product ramp up and Maxtor product ramp down schedule, which should be complete by late 2006. Seagate will spend approximately $500 million in the next six to nine months to “complete” the new plant, expand media operations in Singapore, and optimize its entire HDD, head, and media manufacturing capacities. The MMC equipment assets will transition to Singapore, but we are not sure whether these mature tools can be cost-effectively used in the PMR transition.
Seagate believes that fewer HDD suppliers leads to a more stable market environment. This remains to be seen – competitors are not likely to easily cede market and mind share to Seagate. It is clear that the focal point in the accelerated integration schedule is to stay well ahead of the competition in PMR, the technology inflection point Seagate views as its most profound competitive advantage. Overall, however, a streamlined HDD vendor base will tighten up some of the inefficiencies of the industry’s infrastructure and provide incremental profit opportunities for Seagate and the rest of the industry.

Prior to Maxtor’s acquisition of the Quantum HDD business, the Company, on the one hand, and Quantum and Matsushita Kotobuki Electronics Industries, Ltd. (“MKE”), on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents (the “MDL Proceeding”). The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. The Company purchased the overwhelming majority of spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the Company’s acquisition of the Quantum HDD business, Maxtor assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. The Company filed a motion to substitute the Company for Quantum in this litigation. The motion was denied by the Court presiding over the MDL Proceeding, without prejudice to being filed again in the future.
In February 2002, Papst and MKE entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus the Company, with additional defenses to Papst’s patent infringement claims.
On April 15, 2002, the Judicial Panel on Multidistrict Litigation ordered a separation of claims and remand to the District of Columbia of certain claims between Papst and another party involved in the MDL Proceeding. By order entered June 4, 2002, the court stayed the MDL Proceeding pending resolution by the District of Columbia court of the remanded claims. These separated claims relating to the other party are currently proceeding in the District Court for the District of Columbia.
The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, the Company cannot assure you it will be able to successfully defend itself against this or any other Papst lawsuit. Because the Papst complaints assert claims to an unspecified dollar amount of damages, and because the Company was at an early stage of discovery when the litigation was stayed, the Company is unable to determine the possible loss, if any, that the Company may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against us. The Company made an estimate of the potential liability which might arise from the Papst claims against Quantum at the time of the Company’s acquisition of the Quantum HDD business. The Company has revised this estimate as a result of a related settlement with MKE and this estimate will be further revised as additional information becomes available. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against the Company and its products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, the Company also could be required to pay treble damages and Papst’s attorney’s fees. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although the Company cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate in the future.
Our quarterly operating results have fluctuated significantly in the past and may fluctuate significantly in the future. Our future performance will depend on many factors, including:
• the average selling price of our products;

• fluctuations in the demand for our products as a result of the seasonal nature of the desktop computer industry and the markets for our customers’ products, as well as the overall economic environment;

• market acceptance of our products;

• our ability to qualify our products successfully with our customers;

• changes in purchases by our primary customers, including the cancellation, rescheduling or deferment of orders;

• changes in product and customer mix;

• actions by our competitors, including announcements of new products or technological innovations;

• our ability to execute future product development and production ramps effectively;

• the availability, and efficient use, of manufacturing capacity;

• our ability to retain key personnel;

• our inability to reduce a significant portion of our fixed costs due, in part, to our ongoing capital expenditure requirements; and

• our ability to procure and purchase critical components at competitive prices.

Maxtor Corporation (“Maxtor” or the “Company”) was founded in 1982 and completed an initial public offering of common stock in 1986. In 1994, we sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductors Inc. — “HSI”) and its affiliates. In early 1996, Hyundai Electronics America (now Hynix Semiconductor America Inc. — “Hynix”) acquired all of the remaining publicly held shares of our common stock as well as all of our common stock then held by Hynix Semiconductor, Inc. and its affiliates. In July 1998, we completed a public offering of 49.7 million shares of our common stock, receiving net proceeds of approximately $328.8 million from the offering. In February 1999, we completed a public offering of 7.8 million shares of our common stock with net proceeds to us of approximately $95.8 million.
On April 2, 2001, we acquired Quantum Corporation’s Hard Disk Drive Group (“Quantum HDD”). The primary reason for our acquisition of Quantum HDD was to create a stronger, more competitive company, with enhanced prospects for continued viability in the storage industry.
On May 7, 2003, we sold $230 million in aggregate principal amount of 6.8% convertible senior notes due in April 2010 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. For additional information regarding the convertible senior notes, see the discussion below under the heading “Liquidity and Capital Resources.”

Last edited by pratikkk; April 14th, 2011 at 10:25 AM..
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