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Item 1A. Risk Factors
If we fail to realize the anticipated benefits from our acquisition of HGST on a timely basis, or at all, our business and
financial condition may be adversely affected.
In connection with obtaining the regulatory approvals required to complete the acquisition of HGST, we agreed
to certain conditions required by the Ministry of Commerce of the People's Republic of China ("MOFCOM"), includ-
ing adopting measures to keep HGST as an independent competitor until MOFCOM agrees otherwise (with the
minimum period being two years from the March 8, 2012 closing date of the acquisition). We worked closely with
MOFCOM to finalize an operations plan that outlines in more detail the conditions of the competitive requirement.
Compliance with these measures has affected, and may continue to affect, our business and financial conditions in the
following ways:
limits our ability to integrate HGST's business with our business (and we do not expect to achieve significant
operating expense synergies while the conditions remain in place),
has caused, and could cause further, difficulties in retaining key employees and delays or uncertainties in mak-
ing decisions about the combined business,
has resulted in, and could result in additional, significant costs (including capital expenditures relative to our
competitors as a result of maintaining separate research and development functions), and
has required, and could require additional, changes in business practices.
We cannot predict when the conditions imposed by MOFCOM will be removed. In addition, in the event we fail
to comply with these measures, the time during which we are required to comply with the conditions could be
extended and we could be subject to other conditions or penalties that could adversely affect the business.
The financing of the HGST acquisition may have an adverse impact on our liquidity, limit our flexibility in responding to other
business opportunities and increase our vulnerability to adverse economic and industry conditions
Our acquisition of HGST was financed by a combination of the issuance of additional shares of our common
stock, the use of a significant amount of our cash on hand and the incurrence of a significant amount of indebtedness.
The use of cash on hand and indebtedness to finance the acquisition reduced our liquidity and could cause us to place
more reliance on cash flow from operations to pay principal and interest on our debt, thereby reducing the availability
of our cash flow for operations and development activities. The credit agreement we entered into with respect to the
indebtedness we incurred to finance the Acquisition contains restrictive covenants, including financial covenants
requiring us to maintain specified financial ratios. Our ability to meet these restrictive covenants can be affected by
events beyond our control. The indebtedness and these restrictive covenants will also have the effect, among other
things, of impairing our ability to obtain additional financing, if needed, limiting our flexibility in the conduct of our
business and making us more vulnerable to economic downturns and adverse competitive and industry conditions. In
addition, a breach of the restrictive covenants could result in an event of default under the credit agreement, which, if
not cured or waived, could result in the indebtedness becoming immediately due and payable and could have a
material adverse effect on our business, financial condition or operating results.
In connection with obtaining the regulatory approvals required to complete our acquisition of HGST, we divested certain assets to
Toshiba and agreed to provide certain support services for those assets for a period of time, and our business will be adversely
affected in the event we fail to successfully meet our obligations to Toshiba under the divestiture transaction.
In connection with obtaining the regulatory approvals required to complete our acquisition of HGST, we agreed,
subject to review by regulatory agencies in certain jurisdictions, to divest certain assets to Toshiba that will expand
Toshiba's capacity to manufacture 3.5-inch hard drives for the desktop, consumer electronics and near-line (business crit-
ical) applications. While this divestiture transaction closed in May 2012, we agreed to provide certain support service for
those assets for a period of time. If we are not able to meet our continuing service obligations under our agreement with
Toshiba, the jurisdictions that conditioned their approval of the HGST acquisition on the divestiture could impose cer-
tain obligations on us, including a requirement that we divest the assets subject to the Toshiba divestiture (or other
assets) to another purchaser, which could adversely affect our business, financial condition and results of operations.