Tokyo: Japan's Hitachi Ltd will take over the Hard Disk Drives (HDD) business of US computer giant, International Business Machine (IBM), for $ 2.05 billion, the two companies announced on June 4.

The companies will spin off their HDD businesses into a new joint venture to be wholly owned by the Japanese firm in three years after it starts with an initial 70 per cent stake.

"Hitachi has agreed to purchase the majority of IBM's HDD-related assets for $ 2.05 billion, including the transfer of its intellectual property portfolio to the new venture," the companies said in a statement.

"Hitachi will initially own 70 per cent of this new company and will make a series of fixed payments to IBM before assuming full ownership after three years," they said.

The new firm will be based in San Jose, California, with Hitachi selecting the board of directors. IBM will not be involved in its operations.

Hitachi estimated that the new company could provide some $ 5 billion in sales in the year to March 2004 and is targeting annual sales of $ 7 billion by the year to March 2007.

"By combining HDD research, development, manufacturing, marketing and sales, we are creating a new industry leader fully focused on the $ 20 billion disk-drive market," Hitachi senior vice-president Masaaki Hayashi said in the statement.

The new HDD company will bring together some 24,000 employees about 18,000 from the world's biggest computer maker and 6,000 from Hitachi, with major manufacturing operations at 11 locations around the world.

Analysts said the deal had potential benefits for Hitachi while allowing IBM to focus more on computer services rather than hardware.

"Depending on how they handle the details, this has some positive potential for Hitachi," said analyst Yoshihiro Shimada with ING Baring Securities. "IBM is also not a company that is focusing so much on hardware any more."

Hitachi corporate managing director Jun Naruse was named chief executive officer of the new company, while IBM general manager of Storage Technology Douglas Grose was named chief operating officer.

The companies expect to make a further announcement on the research and development alliance once negotiations have been finalised.

Hitachi shares did not get a boost from the announcement, however, closing down 37 Yen or 3.9 per cent to 909 Yen on the Tokyo Stock Exchange, whereas the Nikkei-225 index fell 248.32 points or 2.1 per cent to 11,653.07.

Hitachi said separately on June 4 that it would seek approval to buy back up to 300 million, or some 10 per cent, of its outstanding shares for as much as 300 billion Yen, though the company added such transactions may not go ahead.

The company attributed the move to the change in the Commercial Code, requiring that all firms gain annual buyback approval.