Fusion-IO (FIO)

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Chipmaker SanDisk Buys Fusion-io For Bargain Price

By PATRICK SEITZ, INVESTOR'S BUSINESS DAILY

Flash storage chipmaker SanDisk on Monday announced a deal to buy Fusion-io on the cheap for $1.1 billion.

Fusion-io (NYSE:FIO), a developer of flash-based hardware and software for enterprise data centers, will provide SanDisk (NASDAQ:SNDK) with a blue-chip customer base, enterprise vertical integration and a road map to higher gross profit margins, Sterne Agee analyst Vijay Rakesh said in a research note.

SanDisk agreed to pay $11.25 a share in cash for Fusion-io, a 21% premium to Fusion-io's closing price on Friday. Fusion-io stock rose 22% to 11.36 on the news, reflecting investor hopes for a possible competing bid. Fusion-io went public in June 2011 at 19 and reached as high as 41.74, in 2011.

SanDisk's flash drives, such as the one above, provide on-the-go solid-state storage for, and access to, movies, music, photos and documents.
SanDisk's flash drives, such as the one above, provide on-the-go solid-state storage for, and access to, movies, music, photos and documents. View Enlarged Image

SanDisk rose 3.6% to 102 on the belief that it got Fusion-io for a song. It hit an all-time high intraday of 102.20. SanDisk stock is up 34% since April, when it reported Q1 earnings that beat views.

"Fusion-io will accelerate our efforts to enable the flash-transformed data center, helping companies better manage increasingly heavy data workloads at a lower total cost of ownership," SanDisk CEO Sanjay Mehrotra said in a statement. "Customers will benefit from the addition of Fusion-io's leading PCIe solutions to SanDisk's vertically integrated business model."

Milpitas, Calif.-based SanDisk expects the deal to close in the third quarter and to be accretive to non-GAAP earnings in the second half of 2015.

"I think SanDisk got a steal with this deal," Summit Research analyst Srini Sundararajan told IBD. Fusion-io is selling for a big discount relative to its peers, he said.

SanDisk is buying Fusion-io for about 2.5 times estimated forward-looking sales. Rival Nimble Storage (NYSE:NMBL) is trading at seven to nine times forward-looking sales. Nimble rose 4% to 27.56 on Monday.

"What they are paying for FIO appears to be a bargain," Susquehanna Financial Group analyst Mehdi Hosseini told IBD.

Salt Lake City-based Fusion-io has had a rough 18 months. It's posted five consecutive quarters of losses, and sales have declined on a year-over-year basis for four of the last five quarters.

Fusion-io's key customers last year were Facebook (NASDAQ:FB), which accounted for 29% of revenue; followed by Hewlett-Packard (NYSE:HPQ) at 17% and Apple (NASDAQ:AAPL) at 15%, Hosseini said. Those three customers accounted for 61% of Fusion-io's 2013 sales.

Fusion-io Products Expensive

Fusion-io has struggled because its PCIe solution is considered expensive, Sundararajan said. It now buys Nand flash memory chips for its hardware from Samsung. SanDisk should be able to cut prices for Fusion-io offerings because it makes its own Nand chips, he said.

PCIe is short for Peripheral Component Interconnect Express. It's a high-speed data transfer appliance used in computer systems.

SanDisk is much larger and should be able to scale the production of PCIe systems. "There is some impetus toward having the same company produce both the Nand as well as the PCIe solution," Sundararajan said. "That's why this purchase makes sense."

Fusion-io investors should not hold their breath waiting for a better offer.

"If somebody was really serious, they would have done it by now," Hosseini said. Of the other Nand chip producers, Micron Technology (NASDAQ:MU) and Hynix couldn't afford Fusion-io because of their current balance sheets; Toshiba has made investments in other fabless solid-state drive producers; and Samsung isn't known for making big acquisitions, he said.

Other recent acquisitions in the flash sector include Western Digital (NASDAQ:WDC) acquiring PCIe competitor Virident for $685 million in cash and Seagate Technology (NASDAQ:STX) buying LSI's flash business from Avago Technologies (NASDAQ:AVGO), UBS analyst Steven Milunovich said in a research note.

William Blair analyst Jason Ader called the transaction a "win-win situation for both companies."

"From SanDisk's perspective, the acquisition transforms the company into the largest player in the PCIe market overnight, significantly extends its enterprise presence, and fits well with the company's vertical integration strategy," Ader said in a research note.

For Fusion-io, the deal represents "the best outcome for the company," which is facing fundamental challenges in the market, including rapidly declining gross margins and a move toward PCIe standardization efforts that threaten its proprietary offerings, Ader said.


Read More At Investor's Business Daily: http://news.investors.com/technology/061614-704879-sndk-to-acquire-fio-to-grow-enterprise-business.htm#ixzz34wkNLO6j
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