Consolidation in the tech industry — especially in the world of big tech — isn’t new, but also isn’t slowing down. And while there are many drivers of big-time deals, such as Seagate Technology PLC (STX) and Western Digital Corp (WDC), actual shifts in technology can be key drivers.
Consider the computer industry. In the 1980s, the age of the central processing unit was born. But as CPUs increased in speed, the complexity and size of the programs being run on them also increased. And it took some time for hard drive disks to catch up with that speed.
In recent years, solid-state drives have addressed that issue. They don’t just speed up activity either — they can also reduce noise and heat, consume less power, occupy less space and are more resistant to physical damage.
Before SSDs really caught on, the hard drive market was already undergoing dramatic consolidation. SanDisk Corporation (SNDK) — one of the two biggest players — bought a company called Fusion-io, STX bought Samsung’s (SSNLF) hard-drive business, WDC bought HGST Technologies, OCZ was bought by Toshiba (TOSBF) and the list goes on.
Why WDC and STX Dominance Isn’t a Benefit
Now, leaders in the hard-drive space have been scrambling to snag some SSD market share. While Western Digital and Seagate own around 90% of the HDD market, that’s not going to do them any good, as enterprises move away from the technology, or even to a hybrid model.
Because they’ve been late to the SSD party, these companies have, again, taken the acquisition route to acquire said market share. SanDisk agreed to a $19 billion merger with WDC a few months ago, while STX turned to Dot Hill Systems — a company I had actually recommended to subscribers before the deal.
The question now is whether these hardware companies are good investments after their big buys. In my opinion, front running the acquisition was the way to go, but I’m not excited or optimistic enough to pull the trigger post-purchase.
The SSD market is quite competitive and it will get even more competitive as prices continue to fall. SSD prices fall an average of 30% per year thanks to Moore’s Law. Meanwhile, these hardware giants are playing catch-up in the space as technology continues to evolve.
Just as I did with Dot Hill Systems, the best strategy is to keep an eye on companies that could be acquisition targets, instead of the big-name companies like WDC and STX. If a hardware giant has gotten too far behind its peers due to slowing sales and Wall Street’s fickle moods, someone is going to make a bid.
To find such targets, look for obviously depressed companies that are already showing signs of recovery. Do not try to chase a tech stock down, as a falling knife removes much of the urgency around the negotiating table and it can make sellers more desperate, cutting into the price.
While the newly merged entities could offer more upside, I would only ride that wave if you were in before the consolidation. And I wouldn’t be opposed to betting on the merger, then getting out soon after.
The tech industry in general is fickle and fast moving. Playing consolidation can be promising, but riding a late-to-the-party hardware maker too long can leave investors disappointed.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.