What: Shares of storage system vendor Dot Hill Systems (NASDAQ:HILL) soared on Wednesday after the company announced that Seagate (NASDAQ:STX) was acquiring the company for $9.75 per share. By 11 a.m. Wednesday, Dot Hill stock had risen by about 87%, to a few cents shy of Seagate's offer price.
So what: Seagate, one of two major players in the hard drive market, will pay about $694 million for Dot Hill, a manufacturer of external storage arrays. This $9.75-per-share price represents an 88% premium to Dot Hill's Tuesday closing price, and a 50% premium to Dot Hill's three-month average stock price. Seagate expects the deal to close during the fourth quarter of this year, and for the transaction to add to its non-GAAP earnings in fiscal 2016.
Seagate has been diversifying its business through acquisitions, and Dot Hill is the third major deal struck by Seagate over the past two years. In 2014, Seagate paid $374 million for Xyratex, a seller of enterprise data storage systems, in addition to buying LSI's flash business for $450 million. Seagate's stock was down slightly on Wednesday's news.
Phil Brace, president of cloud systems and electronics solutions at Seagate, pointed out the benefits of the acquisition: "Dot Hill's innovative storage systems and IP portfolio are a strategic addition to our storage technology portfolio, enabling us to accelerate the growth of Seagate's OEM-focused cloud storage system and solutions business. We are focused on providing the highest quality storage systems for our OEM customers and Dot Hill's storage solutions will enable us to advance our strategic efforts."
Now what: Seagate is transitioning away from simply being a seller of hard drives to being a seller of storage solutions, and the Dot Hill acquisition makes strategic sense. The price Seagate is paying is high, nearly three times trailing-12-month sales and about 50 times TTM net income, but Dot Hill's technology should give Seagate's storage solutions business a boost.
Timothy Green 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.