Aggressive moves

The outlook for the hard disk drive industry is uncertain, with PC demand seen weaker than previously expected, especially among consumers in mature markets. Intel Corp last week warned of a sales shortfall in the third quarter.

HGST turned profitable in 2008 for the first time since it was founded in 2003 after Hitachi bought IBM's hard disk drive operations.

HGST posted an operating profit of $186 million on revenue of $1.5 billion for the 2010 second quarter.

Noble Financial Group analyst Mark Miller said some of HGST's business decisions in the quarter – including boosting production in a tight market – could be viewed as an attempt to gain market share and prepare for a spinoff.

"The thing investors may be overlooking is that maybe Hitachi did this to make (HGST) results look good for an IPO rollout," Miller said.

But HGST's high output led to lower hard drive prices for the overall industry and could end up hurting HGST's valuation. Analysts noted that rivals Seagate Technology Plc, the No. 1 hard-drive manufacturer by revenue, and Western Digital Corp are trading at historically low price-to-earnings ratios.

Weak markets have depressed valuations and spurred increased M&A activity. Miller said there had been speculation in recent months that Web giant Google Inc or infrastructure systems provider EMC Corp could buy a hard drive manufacturer to get an internal supply of drives for their data systems. But he said the speculation has cooled recently as hard drive prices have declined.

HGST could be valued at about $3 billion, based on its revenue over the last 12 months and the value of its main competitors, Seagate and Western Digital, analysts said.

In 2007, when HGST was mired in losses, Hitachi looked into selling a stake in the unit to investment funds such as U.S. private equity firm Silver Lake, according to sources. The Japanese parent decided not to pursue the deal when HGST started turning a profit.

Hitachi President Hiroaki Nakanishi, who was then heading HGST, announced afterward HGST would rebuild on its own, but that he would not rule out one day receiving outside capital for the unit.

HGST is currently led by President and chief executive Officer Steve Milligan, who previously was chief financial officer for Western Digital.