IBM and Hitachi to merge disk drive operations

Once bitter rivals, IBM and Hitachi announced they have agreed to merger

their respective computer hard disk businesses into a new single company to be

headquartered in San Jose in Silicon Valley where IBM's main disc drive

operations and research facilities are based. Reportedly, Hitachi will control a

70 percent stake in the unit.

The two companies will cooperation on developing open data-storage systems in

the competitive storage market. The new company will operate as an independent

entity. Both IBM and Hitachi will purchase the bulk of the company's hard drive

output The deal will be subject to review by the U.S. Justice Department.

IBM counts some 15,000 employees in its hard drive business, at plants in

Singapore, Thailand Japan, Hungary, Germany, Mexico and Hungary. The company has

not determined whether all employees will move to new venture.

The announcement comes just one week after IBM issued a rare warning of

disappointing sales and earnings expected for the first quarter. The Technology

Group, of which the disk drive unit is a major component, has been singled out

as having been the biggest drain on IBM's recent financial performance.

By splitting off the disk drive group IBM will be able to get the troubled

operation off its books while retaining a large equity position into what will

instantly become one of the top disk drive companies in the world. The

Technology Group, lost some $200 million in the first quarter, amid revenue

declines of around 35 percent.

The new entity will stand a good chance to quickly become highly profitable

as it will benefit from the much larger economies of scale when the two units

combine their high-volume production operations. "Size is the answer. We've

got the technology and the people. We've got to get an economy of scale. Merging

these businesses will give us the size we're looking for.'' IBM's senior vice

president of technology and manufacturing, Nick Donofrio said, no name has been

chosen for the new company. Neither is it clear whether IBM will follow a same

strategy for other parts of the technology group which includes the company's

vast semiconductor operations.