Why SanDisk's Acquisition Of Fusion-io Makes Sense

Jul. 8.14 | About: Fusion-io, Inc. (FIO)


SanDisk will buy all outstanding shares of Fusion-io at a price of $11.25 each, totaling to a deal value of $1.1 billion.

Fusion-io's core business is developing solid-state based memory and IO solutions for enterprise databases. Its major customers are Apple and Facebook (44% of revenue).

Now, with the Enterprise SSD market expected to grow from $3B to about $8B by 2017, and considering Fusion-io's blue-chip customer base, SanDisk is technically landing a bargain.

SanDisk Corporation (SNDK), the California-based storage devices company, announced on June 16, 2014, that it has entered into a definitive agreement to acquire Fusion-io Inc. (NYSE:FIO), the solid state based input output solutions provider used in enterprise data centers.

SanDisk will buy all outstanding shares of Fusion-io at a price of $11.25 each, totaling to a deal value of $1.1 billion. Fusion-io's stock opened 23% up on June 16, 2014, due to the buy-out announcement, while SanDisk Corporation's stock was also up 3.5% post acquisition announcement the following day. However, Fusion-io shares are now down to about $11.26 a share, which is close to the offer price.

In general, Fusion-io shareholders could have cashed in to profit on the event-driven rally following the announcement of the merger, as the stock is now evening to the offer price. On the other hand, SanDisk shareholders are now anticipating what would likely change the picture of the company in the SSD and Flash memory market as it seeks to dominate the industry in the coming years.

So why exactly is this deal so important to SanDisk?

Fusion-io's top-notch clientele and product offering

Fusion-io's core business is developing solid-state based memory and iO solutions for enterprise databases. Its major customers are Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) (44% of revenue).

While for some this appears to be a dangerous over-reliance on a few companies for a significant chunk of revenues, this also provides SanDisk with an access to blue-chip customers in the Enterprise SSD market.

Furthermore, once the merger is completed, the product mix will include SanDisk's own products and portfolio of clients thereby hedging the risk of over-reliance.

Fusion-io's other offerings include PCIe storage and ioControl, which have high growth potential in the near term as a solid state alternative to current platforms (Nimble, Nutanix).

Fusion-io's product mix will enrich SanDisk with IP portfolio in enterprise storage technology, which SanDisk can market to its enterprise customers using its vertically integrated structure and worldwide reach.

Therefore, the merger is not merely a matter of adding up units, but also outlines a clear strategy that could result in notable revenue and operational synergies.

The price paid (21% Premium) appears cheap in the long term

SanDisk, which has a cash balance of ~ 1 billion and reserves worth ~ 7 billion, will make the buy-out entirely by cash. The offer price of $11.25 per share offers a premium of ~21% to the closing price of June 13, 2014. Following the tender offer announcement, the price of Fusion-io surged to $11.36 on the close of June 16, 2014.

The company's 21% purchase of Fusion-io will hit the books soon, but the benefits are not expected to begin trickling in until 2016. SanDisk has announced that the tender offer will be complete by Q3 2014.

The purchase of Fusion-io (market cap: $1.23 bn) is attractive for SanDisk (market cap: $20 bn) due to cheap valuation of Fusion-io, whose book value had reduced to ~$5 per share following its poor results in CY2014. The acquisition values Fusion-io at about 2.4x in forward P/S, based on the 2015 estimates.

Now, with the Enterprise SSD market expected to grow from $3B to about $8b by 2017, and considering Fusion-io's blue chip customer base, SanDisk is technically landing a bargain, which aligns well with its long-term strategy.

SanDisk reported a 125% increase in EPS to $5.35 in FY2013 beating Street estimates. In 2014, the company envisages higher volumes in retail storage devices and continued strong demand in mobile phone sales.

This means that a good company is about to become great, as it seeks to cement its position in a market that promises substantial growth over the next three years.

SanDisk, which is currently fifth in the Enterprise SSD market, is planning to become the largest player by 2017 and the acquisition of Fusion-io, which is one of the top five players in the enterprise SSD market, will greatly enable SanDisk to achieve its 2017 market share target.

In addition, SanDisk's UltraDIMM platform for servers can add flash capability to traditional PCIe platform (which is Fusion-io's product). The addition of PCIe IP from this acquisition will help SanDisk sell UltraDIMM to existing PCIe customers with improved capability.

Good does not come without a few obstacles

SanDisk's share price has increased 53% since January 2014 following better-than-expected results in 2013 and Q1 2014. The announcement of the Acquisition of Fusion-io could not have come at a better time, as the stock has since continued with its rally. There are significant positives associated with this deal, all be it, for the long-term investor.

Now, as noted, the 21% premium on the price paid to acquire Fusion-io appears to be cheap based on the long-term benefits associated with the deal. The IP portfolio acquired a big chunk of enterprise customers of Fusion-io and should provide revenue synergies in the long term, especially in the Flash Memory and SSD markets.

The company forecasts to begin booking the benefits from FY2016 onwards, which means patience would be critical in assessing the sensibility of the acquisition.

The tender offer completion and regulatory approval are slated to happen at some point before the end of the year, while at the same time, some investigations are already underway regarding the deal.

Some also are questioning the pricing of the deal, suggesting that it may not be in the best interest of Fusion shareholders. This in a way seems to be backing the argument that SanDisk could be landing a bargain acquisition.

Is SanDisk really getting a bargain?

Fusion-io traded at about $9.30 per share before the acquisition. At this point, the shares had plunged 22.5% from a high of about $12 reached on March 12.

Now, upon the announcement of the deal, the stock rallied to trade at about $11.36 per share. Therefore, based on the pre-acquisition price of $9.30, the deal looks fair.

However, consider the fact that on March 12, shares of Fusion-io traded at about $12.00 per share. From this perspective, one could argue that Fusion-io shares could have potentially recovered to trade close to the $12.00 per share reported in March, in which case it would mean, Fusion-io shareholders have been cheated, thereby rendering the acquisition a bargain.

Therefore, the plunge from $12.00 to $9.30 appears to have made SanDisk's offer of $11.25 per share appear to be an attractive premium, but in real sense, this is a discount price compared to Fusion's valuation of about 3 prior to the acquisition. In other words, SanDisk struck the deal at the right time for its shareholders.

Also notice that Fusion-io had already resumed upward trend just before the deal, rallying from a low of about $7.90 to about $9.28, this indicates that the stock was recovering, and could have potentially gained even higher, assuming that this uptrend had nothing to do with the deal.

This is perhaps the reason why some Fusion-io shareholders may feel cheated in the end.


While SanDisk arguably appears to have landed a bargain in acquiring Fusion-io, the real value is based on long-term revenue synergies. The inevitable dominance of the SSD market is crucial in justifying SanDisk's acquisition of Fusion-io.

The industry remains attractive, which means competition is rife. Therefore, Fusion-io appears to be a magnificent addition to SanDisk's product mix, and sets it well for long-term success in the market.

Nonetheless, successful integration of Fusion-io business into SanDisk will have to be closely watched for sustaining the long-term up-trend in the stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.