Technology mergers tend to happen in waves. It's not just companies that get bought, but technologies, the biggest companies adding proven value to what they have to offer customers.
This trend is now overtaking the flash memory space. Flash memory chips have long been a solid state replacement for hard drives in phones and tablets. They cost more per megabyte, but they make up for that in durability and speed.
With flash now poised to come into cloud server rooms, the big players in the enterprise space are grabbing what they think are bargains. Cisco has bought Whiptail , Western Digital has bought Virident and the focus is now squarely on Fusion-io (FIO +0.00%).
About Fusion-io
Fusion-io, based in Salt Lake City, doesn't make flash chips, but subsystems. Their hardware and software accelerates the rate at which data can come out of a data or cloud center, and into a network.
Financially, the company is not much to write home about. The old enterprises business was highly seasonal, with sales peaking near the end of the year, when Chief Information Officers, or CIOs, dumped their budgets onto vendors rather than see that money go away.
Fusion-io's investment case is based on top-line growth. Sales more than doubled between 2010 and 2012, from $197 million to $432 million. The profit, however, was swallowed up by research costs, which rose from $27 million in 2010 to over $97 million in 2012. As a result, Fusion-io posted a loss for 2012 of $38 million.
Things have only gotten worse in 2013. Sales so far are on pace to match or exceed last year's total, but over $50 million in research costs have helped drive a loss of $55 million. The company itself is in no danger. It's debt free and has positive operating cash flow. But it's clearly got troubles.
Who will rescue Fusion-io
An acquirer could bury those research costs into a larger budget, it could push Fusion-io products to a larger audience through its sales force, and it could make money.
Seagate (STX +0.00%) is considered the most likely buyer. Its hard drive revenues are under threats from systems like those of Fusion-io. It's assumed the company needs a play in flash to match the move of Western Digital with Virident. Even if it offered a big take-out price of $20 per share – two-thirds higher than what Fusion-io presently sells for – it probably has enough cash, almost $2.2 billion, to make that deal quickly.
Seagate itself, however, is not without its problems. The company carries $2.74 billion in long term debt, against an asset base of $9.23 billion. The company's profit history has been up-and-down, $2.83 billion in profits for the year ending in June of 2012 being followed by $1.84 billion in net income for the year just ended.
The high price being touted for Fusion-io assumes there would be other bidders. Are there? Yes.
EMC (EMC +0.00%) could easily outbid Seagate for Fusion-io. The company is, financially, much stronger than Seagate, and could immediately adapt Fusion-io subsystems and software to its own line of cloud hard drives, something PC makers like Apple are doing on their own, combining speedy flash with dirt cheap aluminum and software which makes the mutual advantages transparent to users. EMC in this case would be looking to match the move of Cisco, which now competes with it in storage, and which looks set to end its own alliance with EMC following the WhipTail purchase.
EMC carries a market cap of $56 billion, and has over $11 billion in cash and short-term investments on its books, so even a $2 billion buy of Fusion-io would be fairly easy to do. The company's stock is also a highly desirable currency, given that it also owns 80% of VMware, the leader in virtualization, and a majority stake in the Pivotal Initiative, which is developing a cloud platform with help from General Electric.
Time To Buy
As a stand-alone company Fusion-io is not a great proposition, but as a take-out candidate this is a great idea. There are multiple buyers with a strategic interest in making the purchase, and Fusion-io should be a motivated seller as well.
Any play in merger candidates is speculative, but the risk here is lower than it is for many other companies I've seen.
