DMX: Venture a merger?

This article's return on investment:
- 3G in China is going to be huge
- DMX will be spending S$5 million this year
- Merger with Venture Corporation possible

"I guess we are wanted."

As DMX Technologies await shareholders to approve Venture Corporation's plan to take a 22 percent stake in DMX, CEO Giang Phung is working out how to use the S$70 million they'll receive.

That shouldn't be too difficult, especially given its focus on the Chinese market.

DMX goes 3G

The introduction of third generation mobile telephony in China is a great opportunity for DMX.

Licenses haven't been issued yet, but mobile operators are already conducting software trials.

"We have some information from reputable sources like China Consulting Group that by 2008, there will be about 170 to 200 million 3G users in China," says Phung.

He adds China is ready to issue 3G licenses soon, and hopes to get some contracts in that arena.

Capex

DMX is also planning to head into India, Thailand and Vietnam. That means they'll be spending a little more money this year.

"We are allocating about S$5 million for the total group," says Phung.

"In terms of setting up an office and entering into a country, it would cost you about a million dollars."

Capital expenditure shouldn't pose a problem to DMX, if they have fresh cash from the Venture acquisition.

Merger with Venture?

So how about a merger with Venture?

Phung thinks "anything is possible."

Without elaborating on future plans between DMX and Venture, he believes companies that deal with communication and technology should work closely together to build on their knowledge.

"We take the opportunity, we measure it, we see the benefits and we go and do," says Phung, "So we're very open to Venture."

King of the HDD makers

This article's return on investment:
- Seagate-Maxtor will control almost half of the global hard disk drive market
- Merger will speed up industry consolidation
- Suppliers to Seagate-Maxtor will have to lower their prices
- Flash memory remains close competition for hard disk drives

Singapore-listed suppliers to computer hard disk drive (HDD) makers are going to be under even more pressure, now that Seagate and Maxtor have joined forces.

They will own almost half of the global hard disk drive market after completing their merger in the third quarter of this year.

Smaller hard disk players such as Hitachi, Samsung and Toshiba are also feeling the heat.

And Kaufman Brothers has downgraded US-based Western Digital and warned that a major price war is brewing.

SIAS Research analyst, Alfie Yeo, tells Investor Central's The Insider how this could change the hard disk drive industry in Singapore.

And the situation is unlikely to get better soon, given that more consolidation is expected.

Seagate is taking an 84% stake in Maxtor for US$1.9 billion.

Together, they will become the world's largest hard disk drive maker worth US$10 billion.

"We think that in terms commanding the direction of prices, Seagate-Maxtor would be in a leadership position," says Yeo.

Seagate-Maxtor: More consolidation to come

The hard disk drive industry seems to see one acquisition every five years.

Seagate acquired Conner Peripherals in 1996 and Maxtor acquired Quantum's hard disk drive business in 2000.

Yeo says this deal between Seagate and Maxtor should "accelerate the M&A cycle."

"We believe that the next round of merger and acquisitions would probably be Seagate-Maxtor taking over Western Digital."

He adds Korean or Japanese players are unlikely to be the targets for cultural reasons.

Implications for local stocks

Some locally-listed counters supply to Seagate and Maxtor.

So when news of the merger broke, investors wondered how stocks like Brilliant Manufacturing, Jurong Technologies or Unisteel Technologies would fare.

These companies supply parts to Maxtor and all three risk losing their business once the acquisition is effective.

"In terms of cost down, the impact of it would be much greater among the Singapore players," says Yeo.

He cites Brilliant as being in the most precarious position because Maxtor sales make up at least 80% of its revenue.

Jurong Tech's hard disk drive segment takes up only 20% of its revenue.

Its other major customer is Motorola.

The most resilient of the three seems to be Unisteel, since it has diversified its business and only supplies low cost parts in small amounts to Maxtor.

Unisteel also supplies to Seagate.

In contrast, the winners would be those who sell to Seagate like Magnecomp, MMI and Seksun.

Seagate sales make up a big part of their overall business.

Outlook

There are changes in business trends to which even the beefed-up operations of Seagate will not be immune.

The biggest threat to the hard disk drive industry as a whole is flash memory.

It is based on semiconductor technology and is faster, weighs less and requires less power than traditional hard disks.

Financial website www.thestreet.com quotes Korean flash memory maker Samsung as saying that flash might even find a place in PCs.

That may well be true, given that industry watchers expect flash to hit up to 20 GB in memory space.

But Seagate CEO, Bill Watkins, says he does not see any interest in flash in the PC world.

He says "the two storage media are complementary and are likely to grow rapidly."

"The companies that know the most about flash are investing the most in hard drives."

So we may not see a loser from this. At least for a while.