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Hitachi to form hard drive company with Toshiba, Fujitsu?

Rumors are swirling that the companies will join forces in storage. It makes more sense than the alternatives, observers say.

We haven't able to confirm this, but we've heard it now from a couple of people: Hitachi, the Japanese conglomerate, is talking to Toshiba and Fujitsu about forming a new company dedicated to hard drives and storage systems.

The new company would combine the limping hard drive divisions of Hitachi and Toshiba as well as some of the storage systems technology from Fujitsu. Each would own a third.

The three-way deal is being proposed as an alternative to a private equity buyout. Hitachi has been in discussions with equity firm Silver Lake and others about spinning off its money-losing hard drive group, according to sources and news reports. Those talks, however, have not gone smoothly, sources familiar with the discussions said.

For one thing, Silver Lake has a long association with Seagate Technology. Silver Lake took Seagate private years ago, restructured the company, and spun it out again. Seagate is now profitable and growing. However, the firm and the company have stayed friends. Silver Lake founder Jim Davidson tendered his resignation from Seagate's board in December.

A bigger problem, though, might be cultural. Hitachi is still run like a more traditional Japanese company. That is, the company is somewhat wary of outsiders, but is likely more willing to trust other Japanese partners. One observer noted that a Japanese conglomerate seems a better fit than other proposals that have floated about. Another observed that even though Silver Lake and Hitachi have translators, they probably still aren't speaking the same language.

The Nikkei Business Daily has reported that Hitachi would likely sell less than 50 percent of its stock to Silver Lake. A minority would prevent Silver Lake from exerting control. For a firm that earns money by repackaging and reselling companies, that's a deal killer.

Either way, "something has got to happen," said one former hard drive executive. Hitachi eliminated a lot of executives in an October shakeup. It has also continued to lose ground against Seagate and Western Digital, two drive companies that currently are profitable.

Hitachi got into drives when it bought IBM's storage division in 2002.

If a deal occurs, it will likely occur by April 1, the beginning of the new business year in Japan.

In December, Hitachi said that it wants to improve its hard drive business, but has not decided to sell it. It has not formally commented since. Toshiba and Fujitsu have yet to return requests for comment.

CNET's Dawn Kawamoto contributed to this report.