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OCZ Technology (NASDAQ:OCZ) has lost more than 70% of its value over the last year, as revenue continues to climb but costs keep the company from achieving profitability. Without looking at the stock, 2012 was a pretty good year, as revenue climbed more than 90% and operating margins went from negative 9% to negative 4.8% year-over-year. The problem is that increased competition has kept the company from meeting higher expectations, but as an acquisition target, OCZ Technology looks to be golden.

OCZ Technology produces solid state drives ((NYSE:SSD)), which are often used in smartphones. OCZ Technology has slowly transitioned from a consumer SSD business to an enterprise SSD business, enabling computer clocks to run faster and load images quicker. While many SSD companies operate as hybrids, focusing on consumer and enterprise SSDs, many believe that OCZ has transitioned to become more attractive to potential acquirers.

Last month Western Digital (NASDAQ:WDC) acquired the troubled enterprise SSD company sTec for $315 million. Personally, I love this move on behalf of Western Digital, because it added to Western's core hard disk drive (used in desktops, laptops, DVRs, game consoles) business but also added to its developing SSD business. While many objected to the acquisition -- Western paid about $2.25 per $1 of sTec revenue -- I thought the acquisition was more about gaining additional patents and a new business that Western can grow faster with its outreach.

Moreover, Western's acquisition of sTec created more distance between it and Seagate Technology (NASDAQ:STX). Already, I have said on countless occasions that my preference in the HDD space is Western over Seagate, after having liked Seagate throughout 2011/2012. Western and Seagate are two near identical companies, with near identical market caps and operational metrics. However, Seagate's market share of the HDD market has reportedly fallen to 41% from 43%. Meanwhile, Western's rose to 44.4% from 43.6% year-over-year.

In addition, Western's revenue is rising while Seagate's is falling, and Seagate's gross margin growth is flat, while Western's increased 50 basis points during its last quarter. Therefore, it appears as though Western is creating some separation, and with the acquisition of sTec the company has added a new business, while Seagate is yet to respond.

The separation and the clear improvements of Western Digital is why it makes sense for Seagate to acquire OCZ Technology. Seeking Alpha technology expert Ashraf Eassa showed in a recent article the volume of cheaper sub-$500 million SSD companies that have already been acquired, and that OCZ Technology with its "Barefoot 3" controller is most likely the next best option.

OCZ Technology

sTec

Market Cap

$108 million

$317 million*

Price/Sales Ratio

0.27

2.27

Revenue Growth M.R.Q.

54%

(56.3%)

Return on Equity

(7.77%)

(46.56%)

Operating Margin

(4.78%)

(66.64%)

*buyout price by Western Digital

After looking at the basic fundamental chart above I'd argue that Western Digital could have made a far better acquisition in OCZ Technology, and that Seagate should definitely jump on the opportunity. Hence, I don't consider OCZ to be the next best option, but rather a good option. Seagate could purchase an enterprise SSD company for less than $1 per dollar of revenue, that is still producing growth, and that has better operating margins and has made better investments than sTec. Sure, the SSD market is crowded, but Seagate has the resources available to take any product of OCZ and then maximize it.

In terms of benefit to Seagate, OCZ doesn't add much. Seagate has annual revenue of $15.41 billion, and OCZ has annual revenue of $405 million. Therefore, OCZ on an annual basis would add less than 3% to Seagate's top-line. Therefore, this wouldn't be a massive acquisition to change the complete landscape of Seagate. However, it adds to Seagate's product line, and with Seagate spending a billion dollars per year on R&D, this acquisition would be cheap and would add immediate value.

Therefore, I do think that Seagate will acquire OCZ, and strategically, I think it makes sense. Afterwards, I still think that Western Digital is the best in the HDD space, as it controls more of the space and is slightly cheaper than Seagate in terms of market capitalization. However, OCZ is one step for Seagate to close the gap, and it definitely makes OCZ attractive at its current market capitalization of just $109 million. The bottom line: Expect a nice premium for OCZ Technology.

Source: A Likely Win-Win Acquisition For All Technology Parties Involved