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(Reuters) - Western Digital Corp said it would buy Virident Systems Inc for $685 million as the hard drive maker and Seagate Technology Plc battle for a piece of the fast-growing market for solid-state drives used in servers.
Shares of Virident rival Fusion-io Inc were up 20 percent at midday, with analysts saying the storage drive maker was a likely acquisition target for Seagate, one of the backers of Virident.
Seagate and Western Digital dominate the hard disk-drive market, and have been trying to expand their presence in the faster and more energy efficient solid-state drives (SSDs) market as demand slows in a declining PC market.
Revenue from the enterprise SSD market will grow to $7 billion by 2017 from $2.5 billion last year, Western Digital said, quoting research firm IDC.
Western Digital bought troubled SSD maker Stec Inc for $340 million in June to become one of the top players in the flash drive market.
The company's high offer price for Virident compared with that for Stec suggests that it was involved in a bidding war with Seagate, FBN Securities analyst Shebly Seyrafi said.
Western Digital was not the only company to bid for Virident, it said on a conference call with analysts.
A Seagate spokesman said it does not comment on "rumored, potential or pending acquisition".
Virident, also backed by strategic investors Intel Corp and Cisco Systems Inc, in January signed a deal to develop and distribute flash-based hardware and software to Seagate's customers.
Fusion-io is Virident's biggest competitor in terms of technology, and Western Digital is unlikely to buy it after its Virident acquisition, Technology Insights Research LLC analyst Nehal Chokshi said.
FBN's Seyrafi upgraded the Fusion-io stock to "outperform" from "sector perform", saying "the logic of a Seagate/Fusion-io deal is compelling".
Seagate told Reuters last year it was looking to acquire smaller rivals to boost its presence in the SSD business.
Seagate shares were up 1.5 percent at $40.06.
The Virident operations will form a part of Western Digital's Hitachi Global Storage Technologies unit, following the deal closing, expected in the fourth quarter of 2013. Virident CEO Mike Gustafson will continue to lead the team as a senior vice-president.
RBC Capital Markets was the financial adviser to Western Digital, while BofA Merrill Lynch advised Virident.
Western Digital shares were up 1 percent at $65.64 on the Nasdaq on Monday.
Reporting by Neha Alawadhi and Sruthi Ramakrishnan in Bangalore; Editing by Sreejiraj Eluvangal, Maju Samuel