Technology Holdings Plc and Toshiba Corp. are locked in a contest for TDK Corp.’s magnetic-heads business for hard-disk drives, as the two rivals try to keep pace with demand for AI data-center storage devices.

Toshiba initiated talks with TDK in the spring, followed by a higher offer in the summer from Seagate, people familiar with the matter said. The acquisition is expected to be worth as much as several billion dollars, according to the people, who asked not to be identified as the discussions are private.

The winning bidder will corner a part of the supply chain that’s played a critical role in fostering competition in a hard-drive market that three companies control. TDK is the only independent maker of HDD magnetic-recording heads — the part of a hard drive that actually records and retrieves data — and supplies both its suitors as well as Western Digital Corp.

Representatives of Seagate and TDK declined to comment. A Toshiba spokesperson did not immediately respond to a request for comment.

Both Seagate and Western Digital make magnetic heads in-house, but rely on TDK to cope with surges in demand. Toshiba depends entirely on the Japanese firm for the tiny component, and needs access to TDK’s technology for its plans to mass produce high-capacity heat-assisted magnetic recording hard drives — critical for it to narrow the gap with its bigger competitors.

A deal would shake up an increasingly important segment of the AI data center landscape. Sales of hard drives are booming as more people outsource general-purpose computing tasks to AI, demanding big volumes of data that need to be stored cheaply and over the long term. The winner of the bidding war for TDK’s head unit would gain more pricing power and could limit the ability of its rivals to ramp up output.

The two suitors are fearful of losing access to an independent source of heads should they lose the deal, the people said. Last week, executives of the three companies met in Tokyo to discuss how to ensure continued supply of the key component, including the possibility of setting up a joint venture, they said. Talks are still preliminary and may fall apart, they added.

Any deal would face antitrust scrutiny from regulators, who increasingly see data-center storage capacity as critical for economic security. Seagate and Western Digital each commands around 45% of the HDD market, in terms of bits supplied, while Toshiba holds around 10%, according to research firm TrendForce.

TDK has benefited from surging demand for all Al-related hardware. But the Tokyo-based company is considering a sale of the volatile business that’s historically yielded low margins while requiring consistent investments to keep pace with advances in recording technology.

The company has been shifting more resources to cement its lead in batteries, passive components and sensors, eyeing a projected surge in AI demand from wearables such as smart glasses, the people said. A sale of the HDD head business now would likely bring ample cash for TDK to accelerate investment in such areas, they said.