Fusion-io in Play as Growth, Price Converge: Real M&A

Potential acquirers long tempted by Fusion-io Inc.’s industry-leading growth prospects got another reason to consider a takeover when the memory-technology company’s valuation sank this month.

The price-sales ratio for Fusion-io has fallen to a record low after the chief executive officer and a co-founder both quit this month, according to data compiled by Bloomberg. Despite the plunge, the Salt Lake City-based company’s prospects are intact, according to the average of analysts’ estimates compiled by Bloomberg, with sales projected to more than double through 2015 as more data centers use Fusion-io’s flash-memory technology.

“It’s a leader in a fast-growing segment where most of the other large technology providers have a gap in their offerings,” Abhey Lamba, a New York-based analyst at Mizuho Securities USA Inc., said in a telephone interview. “Any large hardware provider who has storage solutions could find value in them. And any time there’s a break in valuation, buyers are usually more attracted to the firm.”

Fusion-io may lure suitors including NetApp Inc., which Elliott Management Corp. is pressuring to boost shareholder value, and Oracle Corp. even though the new CEO said the $1.4 billion company isn’t for sale, according to Longbow Research. As both a competitor and customer, Hewlett-Packard Co. may be the most logical buyer once its turnaround is complete, Dougherty & Co. said. Fusion-io, which counts Facebook Inc. and Apple Inc. as its biggest customers, has repeatedly been the subject of takeover speculation, starting with a Goldman Sachs Group Inc. report in 2011.

CEO’s Focus

A sale “is not my focus,” Shane Robison, the new CEO, said in an interview on May 8. “My focus is on growing the company and building on what we have. If somebody expresses interest, our board knows how to deal with that.”

Shannon McPhee, a spokeswoman at Fusion-io, didn’t respond to a phone call or e-mail asking whether the company has been approached by suitors.

Robison replaced David Flynn as CEO after Flynn and fellow co-founder Rick White left to pursue “entrepreneurial investing activities,” Fusion-io said May 8. They are both still board members and together own about 3 percent of the company, data compiled by Bloomberg show.

Fusion-io shares lost 19 percent, the most ever, on May 8 after the company announced the management changes. Robison is a former executive at Palo Alto, California-based Hewlett-Packard who helped lead the 2011 purchase of Autonomy Corp., which resulted in an $8.8 billion writedown and allegations of accounting lapses. That track record raised concerns about how well he can direct strategy at Fusion-io, said Andrew Nowinski, a Minneapolis-based analyst at Piper Jaffray Cos.

Depressed Level

Fusion-io’s stock closed at $13.86 today, giving the company a price-sales ratio of 3. Both are record lows, according to data compiled by Bloomberg.

“When the stock goes down, it’s certainly more attractive” for suitors, Joe Wittine, an Independence, Ohio-based analyst at Longbow Research, said in a phone interview. “You have to assume that they were getting interest in the past and maybe the feelers were out there. As a buyer, you would definitely take another look at them now because the stock is cheap.”

Takeover speculation has buoyed the share price on at least 10 days since its June 2011 IPO, according to data compiled by Bloomberg. In October 2011, Goldman Sachs analysts said Fusion-io was among companies with as much as a 50 percent probability of being acquired.

Flash Pioneer

Fusion-io is seen as an attractive target partly because it was a pioneer in flash-memory technology for servers, and competitors are still trying to catch up, Wittine said.

Its software and memory chips work together to speed the rate that server computers can access data, a handy tool for customers such as Apple and Facebook that have data centers constantly processing large amounts of information. Last month, the company said it added music-streaming service Spotify as a customer.

“Fusion-io’s technology is cutting edge,” Mark Kelleher, a Boston-based analyst at Dougherty, said in a phone interview. “It’s pretty amazing and unique.”

Hewlett-Packard, which uses Fusion-io’s products in the servers it sells, is the most logical buyer, though it needs to complete its turnaround efforts before striking a deal, Kelleher said.

100 Times

NetApp of Sunnyvale, California or Redwood City, California-based Oracle should acquire Fusion-io to get a leading position in flash memory, Wittine of Longbow Research said. Oracle has a market value of $161 billion, more than 100 times bigger than Fusion-io.

NetApp, a $13 billion data-storage company, is being pressed by activist shareholder Elliott Management to change its board and study options to boost shareholder value, people familiar with the situation said last week. One way to do that may be to acquire Fusion-io, Wittine said.

“If you’re an activist taking a stake in NetApp and you potentially want it to make some smarter acquisitions, flash is considered one of the areas where NetApp is behind,” he said.

Representatives at Hewlett-Packard, Oracle, NetApp and New York-based hedge fund Elliott Management declined to comment.

Fusion-io would give a buyer access to a business that’s projected to increase sales by 102 percent in the next three years, topping every rival, according to the average of analysts’ estimates compiled by Bloomberg.

While that adds to the appeal, it also means an acquirer will have to pay up to persuade Robison to sell the company, Kelleher of Dougherty said. Mizuho’s Lamba said that just because Robison said he isn’t weighing a sale, it doesn’t rule one out.

“Most companies wouldn’t say if they are available for sale,” Lamba said. “Most of the good acquisitions out there are the ones where management teams remain focused on operations. So we could see activity on that front.”

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