Seagate Technology, Inc. Business Information, Profile, and History

Company Perspectives:

Every time you surf the Internet, hit 'send,' trade a stock online, click on an ad, watch a Hollywood blockbuster or use an ATM, you access, share and store tremendous amounts of digital information. And for 20 years, we've been developing the technology and manufacturing the products that help make all of that happen. Data storage--Seagate's core business--makes billions of Internet pages, millions of transactions and entire new industries possible. Worldwide demand for storage doubles every 9 months, creating a storage market opportunity that is estimated to reach approximately $100 billion by 2002. Given this growth, most major computer companies are looking to storage as their next area of opportunity. And when they look to storage, they look to Seagate--the world's largest and most technologically rich independent storage company.

History of Seagate Technology, Inc.

Seagate Technology, Inc. has been the world's leading independent manufacturer of rigid magnetic disks and disk drives for computers since the 1980s. The company pioneered the downsizing of mainframe hard disk drives, making them affordable for personal computers. In the 1990s the company expanded into software and presently is the leading provider of technology and products that enable computers to store, access, and manage information, including disk drives, magnetic disks and heads, tape drives, and software. In 2000 Seagate was transitioning from public to private ownership, due to a complex $2 billion buyout.

Producing Hard Disks for Computers: 1979-84

Seagate was established in 1979 in Scotts Valley, California, by a group of businesspeople, including Alan Shugart, who had been an engineer with Memorex for four years after spending 18 years at IBM. Seagate was his second startup after having founded Shugart Associates, the company that made floppy disk drives a standard feature on personal computers. When Shugart Associates was sold to Xerox a year later, Shugart was forced out. Of Seagate's group of four cofounders, another significant member was Tom Mitchell. He had come from Commodore, where he had served as general manager of Commodore business machines, and had previously worked at Bendix, Fairchild Camera, and Honeywell. Shugart became president and CEO of the new company, while Mitchell started out as senior vice-president of operations.

Another cofounder was Finis Conner, who left Seagate in 1984 to form Conner Peripherals. It was Conner who approached Shugart with the idea of installing hard disks in personal computers. After competing with Seagate in hard disks for more than a decade, Conner Peripherals was acquired by Seagate in 1996.

Hard disks are made of one or more magnetic-coated aluminum platters. Data is stored on, retrieved from, and erased off the rapidly rotating disk by a mechanical arm, which moves across the disk. The whole mechanism is called the disk drive, or hard drive, and the technology for the sealed unit, which is also known generically as a Winchester disk, is Seagate's basic product. Hard disk technology allows the storage of more data than a floppy disk, and does it at a faster rate.

Unlike larger mainframe computers, personal computers were originally built with only a floppy disk drive and without hard drives. Therefore, the market was open for an independent company like Seagate to manufacture hard drives and sell them directly to computer manufacturers. They in turn would incorporate the drives into their personal computers as add-on features. Seagate's first client was IBM in 1980, just as the latter was about to introduce its personal computers, which would set the standard for the industry. Seagate's first product, a 5.25-inch hard drive, was very successful. By 1982, with sales of $40 million, Seagate had captured half of the market for small disk drives. The company went public in September 1981, with an initial stock offering of three million common shares.

Seagate made a name for itself by producing the least expensive disk drives in the industry, largely due to Mitchell's successful efforts to procure component parts from vendors at the lowest possible prices. In 1983 Mitchell replaced Shugart as president, though the latter remained chairman and CEO. Mitchell also took on the new position of chief operating officer to direct day to day operations, while Shugart oversaw planning.

By 1984 sales had shot up to $344 million as Seagate became the world's largest producer of 5.25-inch disk drives, with three-fourths of the company's shipments going to IBM. Then in mid-1984 the computer industry entered a slump, and the average price for a wholesale ten-megabyte disk drive fell from $430 to $320 in a matter of days. A number of factors contributed to the situation, including a slowing in the growth of personal computer sales, industrywide falling prices, a glut of disk drive competitors, and rising costs of producing the new generation of drives. Diminished growth of personal computer sales came just as the disk-drive companies were squeezing the last profits from their older product lines. These difficulties were intensified for Seagate, with its reliance on IBM's business, when that company reduced orders and began demanding lower prices. Thus, Seagate's sales for the first quarter of fiscal 1985, at $50.6 million, were half of what they had been for the last quarter of fiscal 1984. Annual sales for fiscal 1985 declined 38 percent to $215 million.

Focusing on Low-Cost, Efficient Manufacturing: 1985-91

Mitchell immediately began looking into ways of manufacturing the drives even more cheaply. Realizing that disk drives, as a commodity product, would become subject to price pressures, he had already decided to begin relocating Seagate's manufacturing operations overseas where labor costs were lower, and the pressures resulting from cutbacks forced quick implementation of the move. In July 1984, 900 of the 1,600 employees in Scotts Valley were laid off, as component production shifted to Singapore. By December most of its drives were being produced there, and plans were underway to open another plant in Thailand. In so doing, Seagate successfully followed the Japanese strategy of using less expensive Southeast Asian labor in manufacturing, which had allowed Japanese companies to dominate the floppy disk drive market. Now, however, with the high value of the Japanese yen, Seagate was able to undercut the prices of Fujitsu, Hitachi, NEC, Toshiba, and others, and dominate the hard disk market.

At the same time, Mitchell made one outlet of sales more secure by extending credit to a small but important client, CMS. The latter was buying stripped-down IBM personal computers, furnishing them with Seagate drives and selling them to retailers at bargain prices. Thus, while Seagate's revenues fell temporarily in 1984-85, the company managed to stay profitable.

Seagate was faced with another problem in the fall of 1984--the replacement of its ten-megabyte drives, which were becoming obsolete as higher capacity drives appeared on the market. Mitchell saw an opportunity to outmaneuver a rival, Computer Memories, which was already providing disks with greater memory, but less reliability, to IBM. He promised IBM a shipment of 20 prototype high-capacity, high-reliability drives by December, before Seagate had even finished designing them. Working long hours, Seagate engineers pulled it off. Although mass quantities could not be delivered by March as originally promised, IBM was satisfied and placed orders for tens of thousands of the disk drives.

Seagate also sought to diversify its clientele in order to be less vulnerable to fluctuations in demand. Seagate began marketing more to value-added resellers (VARs), dealers that package stripped-down computer components and software and resell them as specialized systems. By 1987 such dealers came to represent 47 percent of Seagate's clients, up from zero in 1983, while sales to IBM fell to 24 percent. In that year a deal was also signed to supply drives to Hewlett-Packard, among other new personal computer makers. To expand sales internationally, Seagate set up a European headquarters in Versailles, France, in 1987.

Beginning in 1985 Seagate experienced a phenomenal rise in sales, hitting $1 billion in revenue by 1987, with a record $115.3 million in profits. This reflected the rapid growth of the market for hard drives in desktop computers. In 1984 only 15-20 percent of personal computers had hard drives, while this figure had reached 70 percent by 1987, according to analyst Ronald Elijah at Robertson, Colman & Stephans. As the market grew, Seagate was able to maintain its dominant share by keeping its prices down. It had reduced the costs of storing data by 95 percent since it first went into business.

However, Seagate's concentration on efficient production, while allowing technological innovation to take a back seat, made it vulnerable to the boom and bust cycles of the rapidly changing high technology industry. In 1987 computer manufacturers started demanding the smaller 3.5-inch drives earlier than anticipated. IBM, which was purchasing 30 percent of Seagate's 5.25-inch drives, was now planning to manufacture some of its own 3.5-inch drives. As a consequence, Seagate's profits declined by 39 percent during this product transition period in the second half of 1987, and profits remained low into 1988.

Seagate introduced six models of its first 3.5-inch drives that spring, although 5.25-inch drives continued to dominate its sales. The company had added 32,000 square feet to its Singapore plant, where the 3.5-inch disk drives were made. Meanwhile, it expanded operations in Thailand beyond the manufacture of components and sub-assembling to include the complete assembly process and testing of disk drives. More significantly, Seagate began investing greater amounts on research and development in 1987, double the amount of the previous year, by issuing $250 million in debentures. The company established a new research and development facility in Boulder, Colorado, in addition to the one at its headquarters in Scotts Valley.

The market's growth was less than anticipated, however, and revenue for fiscal 1988 declined 50 percent from the previous year, while inventories of 5.25-inch disks piled up. Seagate blamed the problem on industrywide overproduction, while Shugart moved quickly to lay off nearly 2,200 employees in Singapore and the United States. The company barely stayed in the black for fiscal 1989.

Although Seagate remained the undisputed leader in market share, ups and downs in the demand for the personal computer market were a serious concern. Thus, Seagate's next move was to gain entry into the market for the high capacity drives used in mainframes, by purchasing Control Data's disk-drive subsidiary, Imprimis, in June 1989. In addition, the $450 million acquisition nearly doubled Seagate's sales, to $2.4 billion for fiscal 1990, larger than all its U.S. competitors--Conner Peripherals, Maxtor, Micropolis, and Quantum--combined.

Seagate also had an edge on its competitors in its ability to provide consistently lower priced products, because the company manufactured its own disk drive components. In plants throughout the United States and in Asia, Seagate turned out motors, precision recording heads, and other parts. While the company built many of these factories itself, key component suppliers were also acquired by Seagate. In 1987 the company purchased Integrated Power Semiconductors, Ltd. of Scotland--a longtime Seagate supplier--and Aeon, a Brea, California-based producer of substrates to make thin film magnetic recording media.

On the other hand, Seagate continued to lag behind the competition when it came to introducing new technology. 'Seagate has never been that interested in getting products out of the lab first. We wait until we've squeezed every penny of cost out of a product before we bring it to market,' Shugart explained in Forbes in 1991. 'But the product cycles are getting shorter and shorter. Now we can't afford to wait.' The latest product on the market was a 2.5-inch disk drive for laptop and notebook computers. Seagate introduced the drive in November 1990, only five months behind competitor Conner Peripherals, as compared with a delay of a year for the 3.5-inch drives.

Emphasizing New Products: 1991-97

Mitchell's emphasis on high volume manufacturing over product innovation was one of the points of contention that led him to resign under pressure from the board in September 1991. Shugart then reasserted his role in running the company by giving up his position as chairman and assuming the posts of president and chief operating officer vacated by Mitchell. Gary Filler, former vice-chairman, replaced Shugart as chairman. This change in management came on the heels of a disappointing year, with the layoff of another 1,650 workers and revenues down 42 percent.

Firmly in charge again, Shugart pursued a strategy of turning out new products as soon as they were designed. He also began focusing on higher profit margins and specific markets, contrary to Mitchell's goal of general large-volume sales. One of Shugart's first products in this regard was the 1480 disk drive introduced at the end of 1991. This 425-megabyte, 3.5-inch drive was successfully targeted at the high-end workstation and minicomputer markets, where profit margins were greater. Seagate beat the competition by introducing the product first, then continuing to outsell its rivals.

Seagate's profits rebounded beyond expectations in early 1992 as sales of lower priced, high-end personal computers took off amid vendor price wars. At the same time, Seagate also benefited from the current PC owner trend toward buying new higher capacity drives to run more powerful programs. The company's large market share ensured that such upswings in personal computer demand would have a definite effect on its sales.

Shugart in turn pumped those profits into more research and development and strategic investments. In early 1993 Seagate invested $65 million in a factory in Londonderry, Northern Ireland, which doubled its capacity to produce a key part used in its hard drives. In addition, Seagate acquired a 25 percent stake in the Sundisk Corporation--another manufacturer of computer data storage products--and together the two companies produced data storage systems for portable computers and other hand-held electronic devices. In April of that year Seagate signed an agreement with Corning, the glass manufacturer, to provide a new glass-ceramic compound for use in disks. The new material allowed Seagate to reduce the distance between a disk and its magnetic read-write head, which enabled a higher capacity for data.

Expanding into Software: 1993-96

Disk drive makers hit a slump in 1993 due to rapidly declining prices. Industry leaders included Seagate, Quantum Corporation, Western Digital Corporation, Conner Peripherals, Maxtor, and Micropolis. For fiscal 1993 Seagate earned $195 million, while its competitors lost a combined $400 million.

Seagate began acquiring software companies in 1994 to establish a position in data-retrieval software. It acquired software developers Palindrome Corporation of Napierville, Illinois, for $69 million, and Crystal Computer Services Inc. of Vancouver, British Columbia, for $18.6 million. It also invested in Dragon Systems Inc. of Newton, Massachusetts. The company was investing in technologies and companies that would be significant for data management in the future. For fiscal 1994 ending June 30 Seagate reported record sales of $3.5 billion and record earnings of $225 million.

Seagate continued to acquire software companies in 1995, including Frye Computer Systems of Boston for $20 million, NetLabs Inc., and Network Computing Inc. In September 1995 Seagate announced it would acquire competitor Conner Peripherals in a deal valued at $1.04 billion. Conner not only manufactured disk and tape drives, it owned software subsidiary Arcada Software. After experiencing component shortages, price pressures, and significant losses, Conner agreed to a merger with Seagate. The deal was completed in February 1996. Together, Seagate and Conner accounted for about 33 percent of all hard-drive units sold in 1995, making the combined company the market-share leader ahead of Quantum Corporation.

In February 1996 Seagate officially formed a new software group, the Seagate Software Storage Management Group, by combining the operations of Palindrome Corporation and Arcada Software. The division became Seagate Software, Inc., later in 1996 and was headquartered in Arcada's home of Lake Mary, Florida. During the year Seagate continued to acquire software companies, including OnDemand Software Inc. for $13 million and Calypso Software Systems for $13 million. Calypso specialized in enterprise systems management software.

Despite complaints from its distributors that Seagate was forcing them to take more inventory, Seagate enjoyed the highest level of sales for high-capacity, mid-size, and small disk drives, according to the annual brand preference survey conducted by Computer Reseller News. For fiscal 1996 Seagate reported record sales of $8.59 billion and $213 million in net income.

By 1997 Seagate had evolved beyond its position as the world's largest disk drive and components manufacturer into a leading provider of technology and products that enabled people to store, access, and manage information. The company committed more than $479 million in fiscal 1997 to research and development while formally establishing Advanced Concept Labs to pursue R & D activities related to storage technologies. For fiscal 1997 sales were $8.08 billion while net income tripled to $658 million.

In August 1997 Seagate acquired Quinta Corporation, a developer of optically-assisted Winchester technology designed to integrate optical, magnetic, and telecommunications technologies for use in a new generation of high-capacity disk drive storage devices. After paying $10 million for a 20 percent interest, Seagate completed the acquisition for $230 million and was responsible for an additional $96 million based on Quinta achieving certain performance targets. Seagate also acquired Holistic Systems Ltd., which developed software for large-scale, enterprise-wide management information and decision support systems.

In September 1997 Seagate promoted Stephen J. Luczo from executive vice-president to president and chief operating officer. Luczo joined Seagate in 1993 with a background in investment banking. Shugart remained as chairman and CEO.

Financial Woes and Change in Management: 1997-98

Seagate's financial results worsened significantly in fiscal 1998. At the end of 1997 the company laid off 1,400 workers in Ireland and told analysts its third quarter earnings would be less than half of Wall Street's estimates. For its fiscal year ending June 30, 1998, Seagate reported a net loss of $530 million on declining revenues of $6.8 billion. The poor results were due in part to Seagate losing significant market share in the server market, which accounted for about half of the company's revenues. Weak demand for personal computers and lower disk drive prices also impacted the company's earnings. In July Shugart was removed by the board of directors and subsequently resigned his position on the board. Luczo took over as president and chief executive officer. William Watkins was subsequently promoted to chief operating officer.

Among the problems facing the company were integrating recently acquired Conner Peripherals and speeding up the time it took to bring products to market. The company's worldwide workforce had grown to 100,000 employees, of which 10,000 were cut. In addition, Luczo consolidated the company's design centers from five to three. In mid-1998 Seagate acquired Eastman Software Storage Management Group, Inc., a subsidiary of Eastman Kodak Co., for $10 million.

At the end of 1998 Seagate again led the field in small hard-disk drives, according to the Computer Reseller News survey, ahead of Western Digital Corporation and Maxtor Corporation. In the large disk-drive class Seagate also led, ahead of Western Digital Corporation and IBM's Storage Systems Division.

Returning to Profitability: 1998-99

For fiscal 1999 ending July 2 Seagate reported revenues of $6.8 billion and net income of $1.17 billion. While revenues were flat over the previous year, the company improved its profitability in spite of price erosion on disk drive products through extensive cost-cutting and restructuring. During the fiscal year Seagate reduced its workforce from 87,000 to 82,000, of which some 65,000 were employed in Seagate's Far East operations. By the end of 1999 the company's workforce had been reduced to about 71,500 people.

The company's software subsidiary had revenues of $293 million and more than 1,700 employees, making it one of the 50 largest software companies in the world. It was organized in two operating groups, the Information Management Group and the Network and Storage Management Group. In May 1999 the Network and Storage Management Group was sold to Veritas Software Corporation in exchange for 41.6 percent of Veritas's outstanding common stock valued at $3.1 billion.

In the latter half of 1999 Seagate decided to repurchase 50 million of its shares, about 25 percent of the stock outstanding. The previous year it had repurchased 48 million shares. Some analysts considered its stock undervalued, and there were rumors that Fujitsu and IBM were interested in acquiring the company. In December Seagate acquired XIOtech Corp, a storage area network (SAN) vendor, for $360 million in stock.

Going Private: 2000

At the end of the first quarter of 2000 Seagate announced a complex financial deal involving Veritas Software and an investor group led by Silver Lake Partners, in which Seagate would become a privately held company. According to published reports, Seagate decided to go private to get away from the scrutiny of Wall Street investors. Under the terms of the deal, Veritas would acquire all of the Veritas Software shares held by Seagate, while the investor group would acquire Seagate's operating businesses for approximately $2 billion in cash in what was described as a management buyout. The investor group included members of Seagate's management team as well as other investors.

As a private company, Seagate would be able to better focus on strengthening its core storage business. Company executives were more comfortable with their new partners' long-term views, as opposed to Wall Street's shorter-term expectations. Seagate planned to continue to implement its advanced manufacturing technologies, seek operational efficiencies, and position the company to take advantage of increased demand for storage-related technologies and products across multiple markets.

Principal Competitors: Western Digital Corporation; Maxtor Corporation; IBM's Storage Systems Division; Fujitsu Limited; Quantum Corporation.

Chronology

• Key Dates:

• 1979: Seagate Technology Inc. is founded to make hard-disk drives for computers.
• 1981: Seagate goes public with its initial public offering.
• 1989: Seagate acquires Control Data's disk-drive subsidiary, Imprimis.
• 1996: Seagate acquires competitor Conner Peripherals.
• 1996: Seagate forms new subsidiary, Seagate Software, Inc.
• 1997-98:Seagate reports a $550 million net loss on declining sales.
• 1998: Cofounder Alan Shugart resigns under pressure from the company's board of directors.
• 2000: Seagate goes private in a $20 billion stock swap and management buyout.