After two years of speculation, Fusion-io (NYSE: FIO ) has finally been acquired, not by a hard disk drive giant like Western Digital (NASDAQ: WDC ) , but rather SanDisk (NASDAQ: SNDK ) . The acquisition is a bit of a curve ball, leaving a lot of questions as to how this fits with SanDisk's existing business, and whether it was a good move for investors.
What's SanDisk doing?
SanDisk is a semiconductor company focused on memory technologies, while Fusion-io operates in flash data storage, technology often used in data centers and solid state drives, or SSDs. This flash technology increases data processing without disruptions to storage capacity, giving customers more bang for their buck.
While SanDisk proclaims that Fusion-io's data center presence is what it finds most appealing, it's actually the development of the SSD business that seems most interesting. SSDs are the memory and storage used in smartphones and tablets, a very fast-growing space. There are many moving parts in efficiently creating SSDs, including memory technologies like NAND, which are conveniently the bread and butter of SanDisk's business.
This is a rather important fact in trying to determine why SanDisk acquired Fusion-io; SSDs was once a low margin business, but with flash memory, like NANDs, now manufactured into SSDs, margins have risen significantly. Consequently, the business itself has become more attractive to storage giants like Western Digital.
Last year, Western Digital acquired Fusion-io's equivalent in Virident, which was the start of a long line of acquisitions that ultimately created a more profitable SSD business. Fusion-io was rumored to have been an acquisition target, but more buyouts occurred and a Fusion-io acquisition was never announced. All of these buyouts were utilized to create more efficient storage technologies.
Western Digital utilized its acquisitions to create an SSD business that is growing at more than 30% annually, yet accounts for only 5% of its $15.2 billion in revenue. Due to this growth, investors believe this segment will become a large piece of the Western Digital pie long-term. SanDisk might have similar plans for Fusion-io.
Was it a good acquisition?
The questions investors must now ask is why Fusion-io was passed up on so many occasions and what made management sell so cheaply? Looking at a three-month chart, Fusion-io is trading at a loss following the buyout, almost reflecting a sense of urgency on behalf of its management.
With that said, Fusion-io's flash technology is not considered obsolete by any measure. Instead, it has become a staple for other storage vendors. Of course, Western Digital and other HDD manufacturers have elected to acquire flash technologies, but many others have simply launched their own flash software to combine with products, or manufactured NAND with SSDs. This process has made pricing power almost non-existent for Fusion-io, has led to lower-than-expected growth, and has pulled the company's stock from north of $30 down to $11 since its IPO in 2011.
Albeit, Fusion-io does have a leading enterprise business -- an area of strength for SanDisk -- meaning there could be some synergies in this arena, or the potential for SanDisk to increase its scale. However, a $1.1 billion acquisition in an industry where SanDisk is already a leader seems a bit steep, especially when flash technologies are seemingly everywhere.
Therefore, given SanDisk's large, dominant position in data centers, the fact that flash technologies already saturate the market, and the growing competition in SSD from the likes of Western Digital, it's rather difficult to make sense of this acquisition.
At $1.1 billion, SanDisk paid about twice that of other companies that entered the flash space. To maximize the value, it must capitalize in the data center space, while also utilizing Fusion-io's flash technology in SSDs. This might create the need for more acquisitions, evident in Western Digital's strategy, but it's hard to find a way in which Fusion-io gives SanDisk an edge.
With all things considered, Fusion-io accepting the bid shows its willingness to swing at any pitch. For SanDisk, it creates questions of uncertainty, as it's hard to fathom how Fusion-io will add shareholder value.
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