The technology revolution brought about by smartphones and tablets is affecting almost every technology business. The overwhelming need for data and information is creating growth opportunities for several technology organizations, including SanDisk, a data storage company that offers NAND-based storage products. SanDisk's (NASDAQ: SNDK) portfolio includesmemory cards, SSDs, and embedded storage.
Flash-based products are gaining popularity for I/O intensive tasks because mechanical disks cannot cope with current read-write speed requirements. Therefore, research firms project growth in the flash industry. TrendForce believes that the NAND market will reach $28 billion in 2014. SanDisk is very optimistic and believes that the NAND market is well on its way to reaching $38 billion by 2018. Competition always intensifies with growth, and the NAND industry is no exception. SanDisk and EMC (EMC +0.00%), among others, are fighting to take a piece of the NAND pie.
The merger
SanDisk recently announced the acquisition of Fusion-io (FIO +0.00%), a developer of NAND-based PCI-e solutions for enterprises. This development goes hand in hand with SanDisk's strategy to move toward the enterprise segment. NAND-based flash products reside closer to the processing unit and have, therefore, attracted the attention of several large IT organizations. The impressive performance of this technology has won customers like Apple and Facebook. As a result of this acquisition, SanDisk has moved toward a more competitive position in the flash arena.
Source: SanDisk and Fusion-io Websites
Deal terms
SanDisk agreed to acquire Fusion-io for a sum of $1.1 billion, net of cash assumed. SanDisk will offer $11.25 per share to Fusion-io shareholders. However, the share price of Fusion-io is rising as a direct result of this deal, and Fusion-io's current trading value has surpassed SanDisk's offer, so expect SanDisk to revise its bid to capture the controlling-interest in Fusion-io.
Implications
First and foremost, SanDisk will witness benefits of vertical integration; function costs will be reduced by eliminating the duplication of roles across the organization. SanDisk CFO, Judy Bruner, noted that cost synergies will arise from managing one public company instead of two. Fusion-io will switch its NAND supply from Samsung to SanDisk, which will eliminate the premium payable to Samsung, reducing overall costs.
Moreover, SanDisk is ramping-up to use 15-nanometer process technology in its upcoming products, as the company's latest products are based on a 20nm process. Integration of Fusion-io's next-generation products with 15nm process technology will lead to improved density and performance. Manufacturing costs will also decrease as a result of the more advanced process technology. Overall, SanDisk will be able to adequately compete in the enterprise flash-product market thanks to lower costs and better product performance.
Price reductions lead by improved process technology, and the benefits of vertical integration, will make SanDisk's products highly competitive in the data center and server farm markets. Critical success factors will be lower price, enhanced performance, and product density. SanDisk will achieve these CSFs as a result of the merger with Fusion-io.
Bottom line
Data storage needs are growing at an exponential rate. Due to the proliferation of connected devices, this growth is equally matched by the need to access that data. NAND-based storage addresses the problem of latency, hence the NAND market is expected to grow over the next few years. SanDisk will benefit most from this growth because of its advanced process technology and its selection of competitive products. The acquisition of Fusion-io is icing on the cake for SanDisk, thanks to the vertical-integration and synergy benefits it entails. From an investment perspective, SanDisk seems well-positioned to benefit from the future growth prospects of flash storage.
