SanDisk (NASDAQ:SNDK) has entered into a definitive agreement to acquire SMART Storage Systems, a manufacturer of enterprise class SATA and SAS solid state drives (SSD). SanDisk will shell out about $307 million in cash and will provide equity incentives to SMART Storage Systems’ employees. 
This is the second acquisition in the SSD market in two weeks and exemplifies the ongoing consolidation in the rapidly growing SSD market. A few days back, Western Digital (NASDAQ:WDC) announced the acquisition of sTec Inc. for about $340 million in an all cash deal. Below we take a look at how the acquisition of SMART Storage can help SanDisk in the SSD market.
We currently have a $65 price estimate for SanDisk, which is nearly 5% above the current market price. SanDisk’s stock has risen more than 40% this year.
- SanDisk Beats Consensus On Revenue, EPS As Removable Storage Sales Rebound
- SanDisk Earnings Preview: SSD Sales To Continue To Drive Results
- How Has SanDisk’s SSD Division Performed Over The Last Few Years?
- What Is SanDisk’s Fundamental Value Based On Expected 2016 Results?
- What Will SanDisk’s Revenue And EBITDA Look Like In 5 Years?
- SSD, Embedded & Removable Storage: What’s SanDisk’s Revenue & Earnings Breakdown?
Enterprise Demand For Faster Drives is Growing With Cloud Computing And Remote Storage
Low pricing and features such as loss protection and syncing with multiple devices are making remote storage services very popular with users. Various remote storage services like iCloud, Dropbox, Skydrive and Google Drive provide anywhere between 2 GB to 7 GB of free storage, and it costs as little as $10 per year for a 20 GB drive. According to an iHS iSuppli report, the number of subscriptions to cloud storage services was nearly 500 million in 2012, and will reach 1.3 billion subscriptions by 2017.  Further, more businesses are deploying cloud computing environments in an effort to pool resources and cut costs. As more user data moves to the cloud, servers will need to support higher input/output operations per second (IOPS), and thus, use efficient storage by faster drives to do that. Further, as enterprises come to terms with their Big Data resources and adopt solutions to harness insights from them in real time, they will require storage solutions that are fast enough to handle such rapid real-time operations.
In the enterprise storage market, one of the key factors holding back the wider adoption of SSDs is their high cost relative to regular hard disk drives (HDD). On average, SSDs are at least twice as expensive as regular HDDs, and this cost differential is still causing price conscious customers and enterprises to prefer HDDs to SSDs. However, SSD memory production costs are expected to decline going forward, which should lead to higher adoption of SSDs. (We recent discussed this in detail in our note here.)
How SMART Storage Can Help SanDisk
Enterprise SSDs consist of SAS, PCIe and SATA based SSDs. The SATA based SSDs account for close to $1.6 billion in the $3 billion enterprise SSD market while the remaining market is occupied by SAS and PCIe based SSDs.  The SATA SSDs are expected to continue to grow at a decent rate if not faster than SAS and PCIe based SSDs. While SanDisk has a strong presence in the latter sub-markets, it lacks any presence in the largest SATA-based SSD market. SMART Storage manufactures SATA and SAS-based SSDs and supplies it to a number of tier one storage and server original equipment manufacturers (OEMs).
The acquisition will bring SanDisk its first SATA SSD product while complementing its current SAS SSD product line. We believe SanDisk can leverage its expertise in the flash memory market area, its existing relationships with top tier customers and its strong distribution channel to gain more market share in the SSD market. Further, SanDisk has a joint venture with Toshiba for NAND flash production under which it gets 49% of the total production. This gives it an advantage over many companies, which don’t have any control over NAND supply. SMART Storage itself buys its NAND requirements from Toshiba.
We believe that the synergies from the acquisition will enable SanDisk to become a major player in the fast growing SSD market. We estimate that SanDisk’s market share in SSDs was approximately 4% in 2012, and we currently expect this figure to increase to approximately 10% by the end of our forecast period. There could be an upside to our price estimate should SanDisk garner more market share than we currently estimate due to this acquisition.Notes:
- SANDISK ANNOUNCES DEFINITIVE AGREEMENT TO ACQUIRE SMART STORAGE SYSTEMS, SanDisk, July 02 2013 [↩] [↩]
- Subscriptions to Cloud Storage Services to Reach Half-Billion Level This Year, iSuppli, Sep 06 2012 [↩]