Fusion-io Takeover Talk Resurges With Seagate: Real M&A

Fusion-io Inc., a long-speculated takeover target, may be Seagate Technology Plc’s ticket to catching up with Western Digital Corp. in flash-memory technology.

Shares of Fusion-io rose 26 percent after Western Digital said this week it’s buying smaller competitor Virident Systems Inc. for $685 million. Fusion-io, which counts Apple Inc. and Facebook Inc. as its top customers, would give Seagate a stronger position in flash memory, a preferred technology for cloud computing because it provides faster access to data.

Fusion-io is “a prime candidate and there’s a good chance it could get taken out,” Andrew Nowinski, a Minneapolis-based analyst at Piper Jaffray Cos., said in a phone interview. “Western Digital is making all the right moves and, conversely, Seagate really hasn’t made any. Certainly this deal adds to the scarcity value of Fusion-io.”

Seagate Chief Executive Officer Steve Luczo, who said he’s on the lookout for acquisitions to meet demand for cloud computing, now may be pressured to bid for Fusion-io, FBN Securities Inc. said. While Fusion-io’s $1.3 billion market value makes it bigger than Virident, it trades at only 2.5 times sales, according to data compiled by Bloomberg. That compares to the at least 6 times sales that Western Digital is paying for Virident.

Today, shares of Fusion-io rose 12 percent to $14.64 for the second-biggest gain in the Russell 2000 Technology Index.

Flash Storage

Seagate, which makes storage devices, is determining where it has holes to fill and what to potentially buy, Luczo said in a Sept. 9 interview at Bloomberg’s New York headquarters. He also said there’s a bubble in the valuation of cloud-storage providers, which could present buying opportunities when it deflates.

“We do need some technology that we don’t have on the software side,” Luczo said. “When do you buy it and what you pay for it is a different question. Right now it seems a little frothy.”

Brian Ziel, a spokesman for Dublin-based Seagate, said the company doesn’t comment on speculation, when asked if Seagate would be interested in acquiring Fusion-io. Shannon McPhee, a spokeswoman for Fusion-io in Salt Lake City, didn’t return a phone call or e-mail seeking comment.

Annual sales of the types of data-storage devices that Virident and Fusion-io make may surge 180 percent to $7 billion by 2017, according to industry researcher IDC. Flash-storage technology is faster and more efficient than traditional spinning disks, making it useful for Fusion-io customers Apple and Facebook whose data centers are constantly processing large amounts of information.

Takeover Speculation

Before Fusion-io shares surged 26 percent Sept. 9 on news of the Virident acquisition, the stock had fallen 62 percent in a year as competition increased and its CEO and fellow co-founder both quit.

The company has repeatedly been the subject of takeover speculation, dating back at least to a Goldman Sachs Group Inc. report four months after Fusion-io’s initial public offering in

2011. Shane Robison said in an interview on May 8, when he was named CEO, that he would be focused on growing Fusion-io rather than selling it.

“The odds of Fusion-io getting acquired are much higher” following the Western Digital-Virident deal, Srini Nandury, a New York-based analyst at Summit Research Partners LLC, wrote in a Sept. 9 report. “Seagate should acquire Fusion-io for its technology and the progress it has made in establishing the server side flash market.”

Virident Takeover

The deal came as a surprise to some because Seagate and Virident announced a partnership in January, making Seagate an obvious acquirer for the company, according to Shebly Seyrafi, a New York-based analyst at FBN Securities.

“Western Digital, we believe, aggressively came in and scooped up Virident, which Seagate could have looked to acquire,” Seyrafi said in a phone interview. “Western Digital is pulling ahead of Seagate, and the clearest way for Seagate to respond and catch up is through an acquisition of Fusion-io.”

Western Digital has been looking to diversify beyond its hard-drive roots as consumer demand for smartphones and tablets fuels a global slump in personal-computer sales. The Irvine, California-based company announced two deals in June and July -- STec Inc. and VeloBit -- to expand its solid-state memory capabilities.

Deal Multiples

Western Digital is paying about $645 million for Virident, net of cash. While closely held Virident’s revenue wasn’t disclosed, Rajesh Ghai, a Dallas-based analyst at Craig-Hallum Capital Group LLC, said it’s probably less than $100 million, implying that Western Digital’s paying a minimum of 6 times revenue. The median multiple for memory-device deals in the last decade is 0.91 times sales, according to data compiled by Bloomberg.

Fusion-io’s enterprise value of $1.1 billion yesterday was just 2.5 times its revenue, data compiled by Bloomberg show. That’s after it slipped to a record low of 1.8 in August, the data show.

An offer for $18 a share would be a reasonable starting point for a bid, Ghai said. That’s 64 percent higher than Fusion-io’s average price in the last 20 days. As a standalone company, analysts on average see the stock climbing to $15.95 in the next 12 months, estimates compiled by Bloomberg show.

The shares closed yesterday at $13.13, down from an all-time high of $40.34 less than two years ago.

Fusion-io, seen as a pioneer in the flash-memory market, may be a more willing seller now as more competitors begin to emerge, Ghai said.

‘Only Game’

“Fusion-io used to be the only game in town,” he said in a phone interview. “The outlook for Fusion-io is not as rosy as it was, so it may be more open to a takeout than it was in the past.”

Fusion-io’s revenue is still projected to climb 83 percent by 2016 to $790 million, according to analysts’ estimates compiled by Bloomberg.

EMC Corp., the world’s biggest maker of storage computers, may be among other potential bidders for Fusion-io, Seyrafi of FBN Securities said. Dave Farmer, a spokesman at Hopkinton, Massachusetts-based EMC, said the company doesn’t comment on acquisition speculation.

“It’s not like Seagate’s the only one that would be interested,” Seyrafi said. “Fusion-io’s attractiveness as a takeout candidate has increased. It could be valuable within a larger entity.”

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