A Sea Change at Seagate

Bashed by the slump in PC sales and slow to change with the times, the storage leader is shaking up top management

By Arik Hesseldahl

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Editor's Note: An earlier version of this story had the name of former Seagate executive Jim Druckrey misspelled. Additionally, he left Seagate to work for Bose, not Palm.

With its stock dropping like a brick in a barrel, hard drive giant Seagate Technology (STX) surprised few people when it announced plans to lay off 10% of its workforce in a bid to reduce costs. But what wasn't expected was that among those getting pink slips would be CEO Bill Watkins and Chief Operating Officer David Wickersham. In a surprise move on Jan. 12, Chairman Steve Luczo reclaimed the CEO position, which he also held from 1998 until 2004.

Luczo, an investment banker by training, was a senior managing director at Bear Stearns in the early 1990s and the driving force behind the deal that took the company private in 2000. Seagate returned to the public market two years later. Analysts say he's unlikely to remain in the CEO's office for long, keeping the post on an interim basis until operations are turned around. "Luczo does not want to do the day-to-day operation," says analyst Krishna Chander of market research firm iSuppli. "He'll want to reposition the company and then hand it off to someone else."

Seagate didn't return calls seeking comment.

Computer Crater

There's plenty of work to do. Seagate's stock price has fallen more than 80% from its 52-week high of 24.11, and dipped nearly 16% on news of the shakeup on Jan. 12, finishing at 4.76. Part of the precipitous drop in 2008 can be explained by the cratering of demand for personal computers. Still, rival Western Digital (WDC) has seen its stock drop by only two-thirds, while the shares of other key PC suppliers like chipmaker Intel (INTC) have lost only half of their value or less.

Seagate is still the largest hard drive manufacturer in the world, and owes that in part to its $1.9 billion acquisition of Maxtor in 2006. Of the roughly 694 million hard drives sold in 2008, about 178 million were sold by Maxtor, giving it a roughly 30% share of the market, Chander says. Western Digital sold about 149 million units for a share of just under 25%. Hitachi, Samsung, Toshiba, and Fujitsu make up the balance of the market.

But the hard drive industry has been changing along with the nature of the computer business, yet Seagate has by many measures failed to change as needed, Chander says. For instance, as sales of notebooks have outpaced desktops for the first time ever this quarter, Seagate's share of the notebook business has dropped, while Western Digital and Japan's Hitachi have taken advantage. "Seagate fell short on the 320- and 500-gigabyte models for notebooks and Western really ramped up and took over in that business," Chander says.