Enterprise flash market sees first billion-dollar exit : SanDisk gobbles up Fusion-io

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SanDisk is buying Fusion-io in a bid to capitalize on increasing demand for solid-state memory in the enterprise space, which is seeing rapid volume growth and higher margins than its core consumer products. That combination offers escape from the accelerating commoditization that threatens the Milpitas, California-based company’s bottom line.

The all-cash acquisition is valued at approximately $1.1 billion, which makes it the first deal in the history of the PCIe card industry to surpass the symbolically important threshold of one billion dollars. In comparison, disk stalwart Western Digital paid $685 million for Fusion-io rival Virident last September, while Seagate shelled out $450 million to take LSI’s SSD assets off parent company Avago’s hands earlier this year.

The underlying motive is the same for all three purchases, namely that buying an established business is both faster and potentially more cost-effective than building one from scratch internally. However both Seagate and Western Digital are highly exposed to spinning disk revenue, which is being pressured by flash technology, making their moves a defensive play. In SanDisk’s case, the company has been diversifying by increasingly focusing on selling solid state storage technologies into larger enterprises.

Under the terms of the transaction, SanDisk will gobble up Fusion-io’s outstanding shares for $11.25 each, a mere 21 percent premium over its closing price on Friday. That’s quite a bargain in view of the firm’s dominant position in the server-side flash market and much-touted technological edge, but less so when taking into account its up and down performance since going public. This has led some analysts to speculate there may be other buyers in the mix, including Dell or possibly Samsung.

Fusion-io, which depends on a handful of large customers including Facebook and Apple for much of its revenues, has reported a loss for the past five quarters. Last spring, the company overhauled its executive management, hiring former HP exec Shane Robison as CEO and replacing co-founders David Flynn and Rick White. At the time the company said Robison would focus on diversifying its customer base. Management apparently felt selling now at a price substantially below its 52-week high, was more attractive than slogging it out in an increasingly competitive market.

Although unprofitable, Fusion-io’s technology portfolio has the potential to boost SanDisk’s enterprise efforts, leveling the playing field against rivals like Western Digital and EMC, which dominates traditional external storage markets.

The next EMC could emerge from a new breed of company


According to Wikibon analyst David Floyer, “traditional SAN storage function is shifting toward the server and the next EMC could emerge from a new breed of company, like SanDisk.” But the data center is relatively new turf for SanDisk, and it remains to be seen whether its sales and service organization will be able to navigate this ultra-competitive market.

Fusion-io, which depends on a handful of large customers including Facebook and Apple for much of its revenues, has reported a loss for five quarters in a row and saw year-over-year sales decline in four of those. Management apparently didn’t have a choice but to sell cheap or risk going out of business, an opportunity that SanDisk promptly pounced.

“There was a downturn in sales, which hit them hard. Their long-term ambition was to be the memory company, to regard flash as an extension of memory in the server itself. But they never really got there, it was always treated as [an accelerator for] disk drives,” Floyer said in a special segment on SiliconANGLE’s theCUBE following the announcement of the deal (full video below). “They never got the volume to get it into the general marketplace.”

Although it may not be profitable, Fusion-io’s formidable portfolio and extensive technical know-how have the potential to act as a catalyst for the consumer flash maker’s enterprise efforts, leveling the playing field against rivals like Western Digital that have also made similar acquisitions. But the data center is relatively new turf for SanDisk, and it still remains to be seen whether its sales organization will be able to navigate this ultra-competitive market and exploit the buy to its full potential.

The deal has already been greenlighted by the companies’ boards and is expected to complete in the third quarter subject to regulatory and investor approval.

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