SanDisk Corporation (NASDAQ:SNDK) recently announced its decision to buy Fusion-io for approximately $1.1 billion in an all-cash deal. Under the terms of the agreement, SanDisk will buy all outstanding shares of Fusion-io for $11.25 per share – a 20% premium to the market price.  The acquisition is expected to close by the end of the third quarter. SanDisk is looking to beef up its enterprise storage offerings, as Fusion-io specializes in solid-state storage systems. Fusion-io has over 7,000 worldwide customers and generated over $400 million in revenues in its fiscal 2013.
Flash Storage Solutions Provider
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Fusion-io is a storage hardware and software systems manufacturer that provides flash-based storage solutions to enterprise clients including Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL). The company provides storage products such as flash hardware that accelerates the performance of servers and applications, as well as hybrid flash arrays that support virtual machines (VMs). Fusion-io also provides application solutions that enhance the performance of hypervisor and virtual desktop deployments from leading virtualization providers such as VMware (NYSE:VMW) and Citrix (NASDAQ:CTXS). Apple co-founder Steve Wozniak serves as chief scientist at Fusion-io. 
The Seagate-Avago deal left Fusion-io in a very vulnerable position. Fusion-io’s stock price rose last year when Western Digital acquired Virident, as there were rumors that Seagate would react by acquiring Fusion-io.  With Seagate acquiring LSI’s flash business from Avago Technology (NASDAQ:AVGO), Fusion-io was left to compete with storage giants – Seagate, Western Digital and Micron – rather than being acquired by one of them. Fusion-io’s stock price was over $11 in March but declined to $8 in May. Since that time, the company’s stock hovered in the $8-8.50 range until SanDisk made the announcement to acquire Fusion-io.
Acquisition And Its Impact
SanDisk’s solid state drive (SSD) sales have consistently increased in the last couple of years, with the revenue contribution of SSDs increasing from 9% of net revenues in 2012 to about 19% in 2013.  The revenue contribution of SSDs (which includes enterprise storage products and embedded storage for mobile devices) further grew to 28% of net revenues in Q1 2014.  Competing storage manufacturers such as Western Digital (NASDAQ: WDC) have also reported an increase in enterprise SSD revenues in eight consecutive quarters prior to its most recent quarter.  In the last couple of years, SanDisk has tried to position itself as an enterprise storage provider rather than a manufacturer of removable storage cards for cameras and smartphones. SSDs have significantly higher margins than removable memory chips and USB drives, which is the reason why solid state drives contribute more value to the manufacturer than memory cards and USB drives.
According to SanDisk’s management, the company will have the “broadest enterprise flash solution portfolio” in the industry with Fusion-io products and solutions in its offering.  The growth in digital HD content worldwide has led enterprise storage shipments to grow due to demand from data centers. Flash-based storage is increasingly becoming popular with these data centers due to a low cost of ownership, durable storage and faster access (read/write speeds) than traditional storage platforms. Fusion-io has products with large flash cache storage which makes streaming, storing and reading data much faster. SanDisk is propagating the idea of all-flash data centers, which would help clients manage heavy data workloads with low capital expenses. Fusion-io fits in perfectly with this vision by providing the necessary technology and range of solutions required for the transformation.
Though Fusion-io has more than doubled its revenues from its fiscal 2011 to 2013, the company made a net loss in two of these three years. With SanDisk’s worldwide network and channel partners (boosted by its partnership with Avnet), it can integrate Fusion-io’s technology with its products and cater to a significantly larger customer base than what Fusion-io could manage. Additionally, Fusion-io will stop sourcing its storage chips from Samsung Electronics (PINK:SSNLF) once the acquisition is complete. This would provide an added benefit to SanDisk via its chip manufacturing channel. We currently forecast SanDisk’s share of SSD gigabytes to increase to almost 12% by the end of our forecast period. The Fusion-io acquisition could help the company increase its share on the back of increased software-defined storage offerings. If the company’s SSD market share increases to about 15% by the end of our forecast period it could imply a 7-8% upside to our $86 price estimate for SanDisk.
- SanDisk Signs Definitive Agreement to Acquire Fusion-io, SanDisk Press Release, June 2014 [↩]
- What Does Steve Wozniak Do At Fusion-io, The Register, September 2012 [↩]
- Fusion-io Takeover Talk Resurges With Seagate: Real M&A, Bloomberg, September 2013 [↩]
- SanDisk Quarterly Metrics Q4 2013, SanDisk Investor Relations, January 2014 [↩]
- SanDisk Quarterly Metrics Q1 2014, SanDisk Investor Relations, April 2014 [↩]
- Western Digital Quarterly Fact Sheet Q3 FY 2014, Western Digital Investor Relations, April 2014 [↩]
- SanDisk To Buy Fusion-io For $1.1 Billion, Blomberg, June 2014 [↩]