What Do Recent Seagate Technologies & Western Digital Acquisitions Mean For Fusion-IO?

Fusion-IO is considered by many to be an attractive acquisition target, but based on recent buys in its industry, investors may want to rethink this philosophy.

Jun 4, 2014 at 11:00AM

During Fusion-IO's (NYSE:FIO) 66% stock price loss since its 2011 IPO, it has been the center of acquisition rumors. The seemingly continuous spending spree on flash storage product companies all but adds fuel to this fire. However, as we look at the latest acquisition by Seagate Technologies (NASDAQ:STX) and look back to those by Western Digital (NASDAQ:WDC), the inevitable outcome for Fusion-IO might not be what's expected.

A buying spree that creates logical speculation
Fusion-IO develops flash memory modules for high-performance applications, which is largely considered a growth industry given increased data and more advanced consumer and enterprise technology. Last year, hard disk drive (HDD) manufacturer Western Digital acquired Virident , which is nearly the equivalent of Fusion-IO, for $685 million.

The purpose of Western Digital's acquisition was widely believed to increase its visibility in the fast-growing solid state drive (SSD) market. In this memory market, HDDs are used in PCs and laptops while SSDs are often found in smartphones and tablets. Clearly, the latter is where growth exists. As a result, this acquisition is what really set Fusion-IO buyout talks in motion, or at least made the discussion serious.

Western Digital added fuel to this fire with the acquisition of sTec , a solid state drive maker, for $340 million cash. Afterwords, Western Digital acquired an SSD caching software company called VeloBit , all in the goal of making its SSD business sustainable. Since then, Western Digital's SSD sales have been explosive, albeit still roughly 5% of total revenue. Nonetheless, these acquisitions led many to think that Seagate, Western's HDD peer, would make a move to acquire Fusion-IO.

Latest buy creates substantial doubt
Since April, shares of Fusion-IO have fallen more than 25%. This fall was sparked when its most likely suitor, Seagate, acquired Xyratex . Granted, Xyratex has a smaller presence in storage, but this surprised Fusion-IO investors nonetheless. Perhaps the biggest blow to Fusion-IO investors came last week, when Seagate made an aggressive acquisition in the flash market by acquiring one of Fusion-IO's biggest competitors for $450 million, a segment of LSI .

When you connect all the dots, it doesn't appear than any of the likely suitors are looking to acquire Fusion-IO. Instead, they're poised to compete against it. This is a company that has attempted to be competitive in all avenues of its business, especially pricing and research, in order to grow and attract customers. The end result has been operating margins of negative 25% and growth rates that have fallen substantially in the last two years. This shows that its initiatives aren't paying off.

In fact, with $380 million in annual revenue, Fusion-IO appears by all measures to be a small competitor of Western Digital and Seagate Technologies, two companies with $15 billion and $14 billion in annual revenue, respectively. Both Western Digital and Seagate have great scale, and a market-leading presence in memory drives. This is likely to affect Fusion-IO in a negative way.

Final thoughts
Combined, Western Digital and Seagate Technologies own 85% of the HDD market. Both have become large through mergers and acquisitions. Clearly, both companies are implementing the same strategy with SSD, but so far are staying clear of Fusion-IO.

If you consider the Virident acquisition and others, Fusion-IO's takeout value is worth $22-$27 per share.. Therefore, at $8 you'd think someone would gobble it up as a value opportunity. However, for high-margin companies like Western Digital and Seagate, Fusion-IO's lack of efficiency creates many questions on the sustainability of its business model. This might be the driving force for why no such buyout has occurred.

As a result, potential acquirers have now become enormous competitors, which means that Fusion-IO's shares could suffer further. Looking far ahead, any acquisition will be at a significantly lower price when Fusion-IO's shares fall due to competition. Once they reach a level that is too attractive to pass up, the offers may come. Regardless, Fusion-IO doesn't look good right now.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers