ATTRACTIVE TARGETS: Foong notes that companies with strong balance sheets and net cash positions with synergistic potential will represent attractive M&A targets for the bigger players.

KUCHING: ENG Teknologi Holdings Bhd’s (EngTek) announcement of a potential privatisation exercise in the works has led to speculations of other hard disc drive (HDD) component manufacturers following EngTek’s footsteps down the privatisation or merger and acquisitions (M&As) road.

According to an analyst from ECM Libra Capital Sdn Bhd (ECM Libra), Foong Wai Mun, this was based on the fact that a bigger company would gain from the economies of scale to reduce the manufacturing costs further.

“We do not discount the possibility that other HDD component manufacturers might also follow EngTek’s footsteps down the privatisation road,” the analyst said.

“Already, we have seen the HDD majors reduced from five players to currently only three players with the recent acquisition of Samsung’s HDD business by Seagate and Hitachi Global Storage by Western Digital.”

Foong understood that some of the HDD component manufacturers might have been encouraged by the ‘Big 3’ HDD majors to consolidate amongst themselves.

“A bigger entity will also have more bargaining power when dealing with their customers such as the Big 3 HDD majors. It makes sense for the Big 3 HDD majors to consolidate and streamline their component suppliers for cost efficiency purposes.”

Among those companies highlighted by the research firm were those with strong balance sheet and net cash position with synergistic potential.

“These would represent attractive M&A targets for the bigger players.”

“HDD shipments are expected to rebound in the third quarter as HDD majors like Western Digital and Seagate, which underwent M&A exercises, finishes their assessment of their component makers as well as those from their acquired companies.”

As a result, HDD shipments were forecasted to reach 707 million in 2011, representing a nine per cent growth annually from 2010’s total of 651 million. Growth, he noted, was mainly driven from the 2.5” segment.

“We think this latest M&A news involving EngTek might bring some positive sentiments to the sector and stir interest in other HDD component makers’ stocks in the short-term,” Foong concluded.