Hitachi may sell stake in hard drive unit, sources say

Japan's Hitachi Ltd. is mulling options for its ailing hard disk drive business, including bringing in a strategic investor to turn the business around, sources close to the matter said.

Hitachi, Japan's biggest electronics conglomerate, has not posted a profit in its hard disk drive business in any year since buying it from IBM for $2 billion in 2002 (see "IBM to consolidate hard drive business with Hitachi").

According to several financial industry sources, investment firm Merrill Lynch has sounded out private equity funds that may be interested in the unit.

The Carlyle Group, Kohlberg Kravis Roberts & Co., Bain Capital LLC and Silver Lake Partners are among the funds cited as possible investors, the sources said.

Hitachi may seek a fund to buy an equity stake in the hard disk drive business and then work with the fund to help revive it, one financial industry source said.

It was not immediately clear whether Hitachi would look to sell the entire business or just part of it.

"The negotiations have just started. It is unclear what the outcome will be," said one source.

Merrill Lynch Japan Securities spokesman Tsukasa Noda said he could not confirm whether the bank was involved in any such deal.

A Hitachi spokesperson declined to comment.

Hitachi's hard disk drive unit lost $375 million in 2006, a 60% bigger loss from the previous year, hurt by sliding prices for drives as laptop makers turn to flash memory drives for cooler and faster storage.

The Tokyo-based company, which holds a little less than 20% of the global hard disk drive market, trails industry leaders Seagate Technology LLC and Western Digital Corp., which have been profitable despite aggressive notebook computer pricing.

Hitachi has promised its hard drives would be profitable this year, and has said it would close a hard disk drive parts factory in Mexico and cut 4,500 jobs by the end of 2008.

Hitachi, a sprawling conglomerate whose products range from nuclear turbines to washing machines, has vowed to sharpen its focus to ensure long-term profit growth in the wake of a $285.8 million group net loss in the past business year.

Its announcement in March that it would sell its stake in Japan Servo Co. to precision motor maker Nidec Corp. had fueled speculation among investors that it might do the same with other struggling units.

But Hitachi had said just a few months ago that it had no plans to withdraw from hard drives or from flat TVs, which have also been losing money because of tough price competition.

"We are not raising a flag of surrender," Toyoaki Nakamura, Hitachi's chief financial officer, told a news conference in May.

"We haven't given up on returning these businesses to profitability. We are not considering withdrawing from these businesses," he said.

Talk of a possible deal involving Hitachi's hard drive business comes as consolidation within the industry gathers pace.

Japanese electronics parts maker TDK Corp. agreed earlier this year to take over rival Alps Electric Co.'s business in hard drive heads, which are used to read and write data on the disks.

Alps decided to exit the market when orders dwindled from customer Maxtor following its acquisition by Seagate last year.