Japan's Hitachi Ltd is mulling options for its ailing hard disk drive business including bringing in a strategic investor to turn the business around, sources close to the matter said.

Hitachi, Japan's biggest electronics conglomerate, has not posted a profit in its hard disk drive (HDD) business in any year since buying it from IBM for $2 billion in 2002.

According to several financial industry sources, investment bank Merrill Lynch has sounded out private equity funds that may be interested in the unit.

The Carlyle Group, Kohlberg Kravis Roberts, Bain Capital, and Silver Lake are among funds cited as possible investors, the sources said.

Hitachi may seek a fund to buy an equity stake in the hard disk drive business and then work with the fund to help revive it, one financial industry source said.

It was not immediately clear whether Hitachi would look to sell the entire business or just part of it.

The negotiations have just started. It is unclear what the outcome will be, said one source.

Merrill Lynch Japan Securities spokesman Tsukasa Noda said he could not confirm whether the bank was involved in any such deal.

A Hitachi spokesperson declined to comment.

Hitachi's HDD unit lost $375 million in calendar 2006, a 60 percent bigger loss from the previous year, hurt by sliding prices for drives as laptop makers turn to flash memory drives for cooler and faster storage.

The Tokyo-based company, which holds a little less than 20 percent of the global HDD market, trails industry leaders Seagate Technology and Western Digital, which have been profitable despite aggressive notebook computer pricing.

Hitachi has promised its hard drives would be profitable this year, and has said it would close an HDD parts factory in Mexico and cut 4,500 jobs by the end of 2008.

SHARPER FOCUS

Hitachi, a sprawling conglomerate whose products range from nuclear turbines to washing machines, has vowed to sharpen its focus to ensure long-term profit growth in the wake of a 33 billion yen group net loss in the past business year.

Its announcement in March that it would sell its stake in Japan Servo Co. to precision motor maker Nidec Corp. had fuelled speculation among investors that it might do the same with other struggling units.

But Hitachi had said just a few months ago that it had no plans to withdraw from hard drives or from flat TVs, which have also been losing money due to tough price competition.

We are not raising a flag of surrender, Toyoaki Nakamura, Hitachi's chief financial officer, told a news conference in May.

We haven't given up on returning these businesses to profitability. We are not considering withdrawing from these businesses, he said.

Talk of a possible deal involving Hitachi's hard drive business come as consolidation within the industry gathers pace.

Japanese electronics parts maker TDK Corp agreed earlier this year to take over rival Alps Electric Co.'s business in hard drive heads, which are used to read and write data on the disks.

Alps decided to exit the market when orders dwindled from customer Maxtor following its acquisition by Seagate last year.

Shares of Hitachi closed on Wednesday down 0.3 percent at 701 yen, having lost one-fifth of their value in the past six months, underperforming a 6 percent decline in Tokyo's electric machinery index. (Additional reporting by Taro Fuse, Emi Emoto, Mayumi Negishi, Nathan Layne)

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