Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
Violin Memory's brief life as a public company has been a bust for investors. As the company now considers the possibility of cashing out, there are plenty of reasons for regrets.
The maker of flash-memory storage systems said late Wednesday that it's exploring strategic options, the same day it reported the latest in a string of disappointing quarterly results. Investors, already burned by year-to-date losses of more 70 percent, weren't cheered by the prospect of some type of premium from a sale to ease the pain: Instead, they drove the shares down even lower on Thursday. Violin ended the day as a penny stock, closing at 96 cents.
It didn't have to be this way. In fact, Violin probably never should have gone public in the first place.
Back in 2012, when the company filed for an IPO, bankers were talking about valuations in the range of $2 billion. But then Hewlett-Packard, the largest re-seller of Violin's storage technology and a big source of its revenue, decided to focus on marketing its own products. It was the kiss of death -- and yet, Violin went ahead with the IPO anyway, raising $162 million in an offering that valued the company at $736 million. That's the highest it would ever get: The stock had an inauspicious debt, plunging 22 percent in its first day of trading, and it kept on going from there as the company racked up losses.
Within months of the IPO, Violin had already lost more than half its value, prompting shareholder Clinton Group to push for a sale in December 2013. The company temporarily tamed the activist investor, striking a standstill agreement in 2014. Yet the downward spiral continued. As of Thursday's close, Violin's market value was less than $100 million.
Violin has been caught in the teeth of an architectural shift in the storage market over the last few years, according to Anand Srinivasan of Bloomberg Intelligence. While flash providers are taking away market share from traditional hardware companies, the overall storage-systems market is declining. Cloud operators are increasingly buying component technology and building their own setups, leaving companies like Violin out in the cold. At the same time, Violin's focus on flash makes it too specialized to complete with the likes of EMC, which can offer customers a full suite of storage products.
It's hard to see who would want to buy the company today. At one point, Clinton Group said there were at least five different suitors interested in Violin. TheDeal.com reported in February 2014 that HP, Samsung Electronics, EMC, IBM and Seagate Technology had held deal talks with the company. There's reason to think all of those companies would no longer be interested.
EMC is now getting acquired by Dell, so it's probably busy for a while. Seagate also just did a decent-sized deal in Dot Hill Systems. It's hard to see HP rushing to do this when its own flash storage business 3PAR is doing pretty well. IBM and Samsung Electronics have made investments of their own. Violin has some unique intellectual property, but it may just not be worth it.
The company is burning through cash and it's probably too damaged for private-equity firms to touch.
There could still be a few suitors that see value here, but they'll likely be able to name their price. Whatever it is will be dirt cheap.
No wonder investors aren't applauding Violin's swan song.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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