The king of flash memory storage solutions and related software, SanDisk (NASDAQ:SNDK), announced on June 16 that it is buying Fusion-io (NYSE:FIO) for roughly $1.1 billion in an attempt to bulk up its flash storage business.
SanDisk's offer is equivalent to $11.25 per share, representing a premium of 21% to Fusion-io's price on June 13. The premium may seem unjustified to many investors, as Fusion-io has reported a loss in five consecutive quarters. Why is SanDisk acquiring an unprofitable organization? Is this a good deal for SanDisk?
Founded in 2006, Fusion-io quickly became famous for its solid-state drives, or SSDs, which are faster than traditional hard disks. One of the first companies to build enterprise storage using SSDs, Fusion-io became famous among Internet companies due to the suitability of its products to handle big data. In 2012, Facebook and Apple accounted for more than 50% of Fusion-io's revenue.
The attractive enterprise SSD market
The acquisition of Fusion-io will allow SanDisk to get exposure to the fast-growing enterprise SSD market. According to research firm IHS, the number of SSDs sold for use in corporate storage could surge 39% a year through 2018 after reaching 4.5 million units in 2013.
Because of their superior performance, SSDs have quickly become very popular among data centers, Internet companies, and start-ups. They are now being built into laptop PCs, despite being more expensive than traditional drives. However, this could be just the beginning of a superb growth story, as the demand for SSDs could increase enormously along with the amount of data in the world.
Fusion-io is unprofitable
Note Fusion-io's five consecutive quarterly losses. The company has struggled with losses since its initial public offering in 2011. In the most recent quarter, Fusion-io's sales grew 6% to $100.5 million. However, this wasn't enough to prevent a loss.
One reason for Fusion-io's unprofitability is that the company is too dependent on Facebook and Apple, which already have plenty of flash storage in their power.
The road to profitability
SanDisk could make Fusion-io profitable in the mid-run. SanDisk's huge customer base offsets Fusion-io's concentrated set of customers. Through SanDisk, Fusion-io could be able to reach out to a broader set of customers. Moreover, SanDisk has enough resources to promote Fusion-io's products globally.
The acquisition price
SanDisk's offer is equivalent to $11.25 per Fusion-io share. Considering that Fusion-io has roughly $225 million in cash on its balance sheet, the actual amount that SanDisk is paying per Fusion-io share is roughly $9, which is equivalent to a valuation of 2.5 time sales. In exchange, SanDisk gets exposure to the fast-growing SSD industry and plenty of valuable patents, as Fusion-io products usually score high in product performance testing.
The acquisition of Fusion-io is consistent with the trend of consolidation within the memory industry. For example, in late May, storage provider Seagate Technology purchased Avago's flash business for $450 million. And in September 2013, Western Digital acquired server-side flash company Virident for $683 million, only three months after Virident spent $340 million to purchase SSD company STec. The consolidation in the industry is probably being caused by a desire to benefit from scale advantages, optimize research and development expenses, and get access to a larger customer base.
Final Foolish takeaway
By acquiring Fusion-io for $1.1 billion, SanDisk gets a highly valuable portfolio of patents. It also gets direct exposure to a fast-growing memory segment, as Fusion-io was fifth in the overall enterprise SSD market last year, according to Gartner. Of course, there are several challenges ahead, including making Fusion-io profitable. That being said, SanDisk has a fair chance of turning around Fusion-io's financials, as it could offer Fusion-io's memories to a broader audience after the acquisition takes place.
Victoria Zhang has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.