Fusion-io Bidder Seen Winning Wozniak’s Facebook Sales: Real M&A

Fusion-io Bidder Seen Winning Wozniak’s Facebook Sales
David Flynn, president and chief executive officer of Fusion-io Inc., left, Steve Wozniak, chief scientist of Fusion-io, center, and Rick White, co-founder, executive vice president and chief marketing officer of Fusion-io, smile during the opening bell ceremony at the New York Stock Exchange in New York on June 9, 2011. Photographer: Peter Foley/Bloomberg

Fusion-io Inc., the maker of flash-memory technology that counts Facebook Inc. as its biggest customer and Steve Wozniak as chief scientist, is also offering potential buyers three times the average growth of its rivals.

Fusion-io’s revenue is projected to climb 82 percent in the next two years, the fastest rate among its competitors in the data storage industry, according to analysts’ estimates compiled by Bloomberg. Even with the shares down 18 percent through yesterday since Fusion-io reported higher costs last week, investors were still willing to pay $6.25 for every dollar of 2012 sales to own the stock as companies shift to flash memory, which can access data faster than traditional storage devices.

While Fusion-io is more expensive relative to sales and earnings than its rivals, the $2.1 billion company would be able to fetch as much as $40 a share in a takeover, said ThinkEquity LLC, 50 percent more than its 20-day average. Buying Fusion-io, which went public in June with Apple Inc. co-founder Wozniak as chief scientist, could help companies from Dell Inc. to Hewlett-Packard Co. and International Business Machines Corp. make their servers run faster, said Benchmark Co. and Piper Jaffray Cos.

“Fusion-io is one of the pioneers” in the shift to flash-based storage, Rajesh Ghai, a San Francisco-based analyst for ThinkEquity, said in a phone interview. “If you have a company that’s in an attractive market and has leadership in that technology, it is going to be a strong acquisition candidate.”

Robert Brumfield, a spokesman for Salt Lake City-based Fusion-io, didn’t respond to a phone call or e-mail seeking comment.

Apple Co-Founder

David Frink, a spokesman for Round Rock, Texas-based Dell, Michael Thacker of Palo Alto, California-based Hewlett-Packard and Doug Shelton for IBM in Armonk, New York, said the companies don’t comment on speculation, when asked whether they have considered a takeover of Fusion-io.

Shares of Fusion-io climbed as much as 5.1 percent today and were up 0.8 percent to $23.92 at 9:55 a.m. in New York.

Founded in 2005, Fusion-io combines software and memory chips to speed the rate that server computers can access data. The flash-memory cards have no moving parts, unlike traditional disks that rely on spinning platters to hold information.

Facebook, owner of the world’s most popular social-networking service, is Fusion-io’s biggest customer and accounted for 36 percent of revenue in the year ended June 2011, according to a regulatory filing. About 24 percent of sales came from Apple, which Wozniak co-founded in 1976 and is now the world’s most valuable company, and 14 percent from Hewlett-Packard. Fusion-io has also added Salesforce.com Inc. and Pandora Media Inc. as customers.

‘Certainly Looks Expensive’

Since Fusion-io’s initial public offering 11 months ago, the shares climbed 25 percent through yesterday, almost three times the gain for the Russell 1000 Index.

At 6.25 times estimated sales of $342 million for the year ending in June, Fusion-io had a higher valuation than all 15 of its publicly traded competitors in the data storage industry that were identified in its annual regulatory filing.

After reaching its first annual profit in fiscal 2011, Fusion-io traded yesterday at 2,372 times earnings in the last 12 months and was also the most expensive in the group relative to estimated earnings for the next two years, data compiled by Bloomberg show. Fusion-io’s rivals had a median price-to-earnings ratio of 15.

“If you put it in perspective with a lot of other tech hardware names, Fusion-io certainly looks expensive,” Andrew Nowinski, a Minneapolis-based analyst for Piper Jaffray, said in a phone interview. “But this market is a very large opportunity. They should be garnering a significant M&A premium.”

Surging Sales

A buyer would be paying up for sales that analysts estimate will climb 82 percent to $623 million in 2014 from the current fiscal year. That compares with an average growth rate among its competitors of more than 27 percent in the next two years, the data show.

“Three years back it didn’t have any revenues and right now it’s at the cusp of generating about $100 million a quarter,” said Ghai of ThinkEquity. “It’s obviously growing very fast.”

Hewlett-Packard, IBM or Dell may be interested in acquiring Fusion-io to gain its flash memory-based technology that’s used in the servers that each of them sells, said Gary Mobley, a St. Louis-based analyst for Benchmark, who puts the odds of an acquisition at more than 50 percent. Buying Fusion-io would give them a newer, high-margin product with the opportunity to increase revenue as companies such as Facebook and Apple expand their data centers, he said.

‘Getting the Benefits’

By putting Fusion-io’s memory cards inside the servers, data needed for running applications such as Facebook’s social-networking website or Apple’s iCloud online service can be accessed faster, according to Piper Jaffray’s Nowinski.

Fusion-io’s product “dramatically improves the performance of a server,” he said. “Any one of those vendors, they’re all getting the benefits of Fusion-io and can’t really differentiate their server platform from the other. They would benefit from owning Fusion-io, really being able to leverage that technology and make it more proprietary to their own platform.”

Still, Fusion-io may be too pricey for potential buyers as it struggles to remain profitable, Richard Shannon, a Minneapolis-based analyst for Craig-Hallum Capital Group LLC, said in a phone interview.

Analysts estimate the company will report a net loss, on an unadjusted basis, of almost $11 million this year after profit of $4.6 million last year.

‘Less Positive’

“I am a lot less positive on the company being bought out because of valuation,” Shannon said. “It is extremely expensive.”

Josef Schuster, founder of Chicago-based Ipox Schuster LLC, which bought shares in Fusion-io’s IPO, said the company may not yet be “seasoned enough” for an acquisition. Potential buyers need more time to gauge the publicly traded business, said Schuster, whose firm oversees about $2 billion tied to indexes that track IPOs.

As corporations require faster and faster data speeds, Fusion-io’s future sales potential may be enough to lure buyers, said ThinkEquity’s Ghai. He estimates Fusion-io could fetch $35 to $40 a share in a takeover, based on revenue multiples paid in comparable transactions and the stock’s all-time high of $40.34 in November. The shares closed yesterday at $23.72.

“People value these companies based on where they could be in a few years’ time, rather than where they are right now,” Ghai said. “As long as there are customers willing to buy this technology and replace existing traditional storage architectures, Fusion-io appears to be an attractive company to buy.”

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