The king of flash memory storage solutions and related software, SanDisk (NASDAQ: SNDK), announced on June 16 that it is buying Fusion-io (FIO +0.00%) 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?
Source: Fusion-io
Fusion-io
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.
Industry consolidation
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.
