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Overland Storage (OVRL) launched litigation against IBM (NYSE:IBM), DELL Inc. (NASDAQ:DELL), BDT AG, BDT-Solutions GmbH based in Germany and BDT Products in Irvine, California. The complaint broadly claims infringement of BDT's products and it specifically identifies BDT's FlexStor II product line as infringing on Overland's Storage patents.

BDT is the largest tape provider in the world (60-80% of the market). OVRL claims that BDT infringed on its patents and started selling equipment to Hewlett Packard (HPQ). Defense of the litigation for BDT could eclipse $70mm, which is equal to the market capitalization of Overland. BDT won the contract with Hewlett Packard approximately 5 years ago by giving a discount with an identical product. The HP business represented 70% of Overland's revenue at the time (approximately $150mm per year).

Overland is represented by DLA Piper (the largest law firm in the world), with the case taken on contingency. John Allcock (lead counsel) has never lost a case in his career; he's taken 71 infringement cases to trial and won. The win number does not include settlements. The suit was filed with the ITC (International Trade Commission) where DLA is 9-for-9 in their cases.

On the last conference call Eric Kelly (Overland's CEO) surprised investors with the statement that IBM and Dell have settled "As of today we are pleased to report that the ITC action and district court action against IBM and Dell have been resolved by settlement. Overland plans to continue the infringement case against BDT and we remain optimistic about the outcome."

What investors seem to have missed in that statement is highlighted in the OVRL 10q "Such settlement includes a multi-year agreement, a release of claims against IBM and a cross-license agreement."

In my opinion that OVRL's attorney's would not have settled this case for less than $10 Million from both IBM and Dell, and that the multi-year agreement may generate a ton of cash for OVRL's balance sheet.

While the final decision against BDT in the case has now been put off until January 12, 2012; I still believe that it is highly likely that OVRL will emerge victorious in the lawsuit.

Having read the trial transcript (yes all 3500 pages - can provide a copy if anyone's interested) I have found that OVRL has twenty infringement claims against BDT. It is my understanding that if even one of those twenty claims is found valid then BDT has to cease delivering to and servicing its customers in the U.S. The decision has only one chance to be overturned -- by the President of the United States. That is unlikely. Our government wants the jobs to stay in the U.S. and jobs in San Diego add a lot more value than in Germany. I believe that there has only been one case overturned in the history of the ITC.

So what happens next if the case is decided in Overland's favor? BDT is at risk of losing its entire U.S. operations, about $300M (my estimate since BDT is private)in annual total transactional revenue. Do you think BDT will offer a settlement to Overland? Of course it will. The question will be how much? My educated guess is a structured settlement of $60 million over five years. Overland has 28 Million shares outstanding and is currently at $2.10 a share.

So where does Overland go next? Well, in my opinion, there are at least ten other companies directly violating the Overland patients. The most obvious offender in my opinion is Quantum (NYSE:QTM). I would imagine that Overland would write letters to each of the offending parties explaining the significance of the IBM and Dell settlements and the court's decision against BDT. These letters would offer settlement agreements that companies such as Quantum would most likely agree to. My fund currently has a large short position in Quantum. Having IBM and DELL settle the lawsuits in advance of the judge's decision was a huge win for Overland. The decision by the 800 lb. Gorilla to settle set a massive precedent that should keep others who are currently infringing on the patents reaching into their cash hoards.

My best guess is that Overland nets over $100 Million in agreements and settlement funds after attorney fees. My target on the stock is $7.50.

I would expect a settlement between now and January 12th. I do not think that BDT will risk a decision by the judge. Investors who have been taking tax losses on Overland in the last few weeks may be left in the cold if a surprise decision is announced before January 12th.

This is a case of a potentially huge win for shareholders with limited downside. If the case is not successful, shareholders still have a storage company selling for (0.5x EV/FY12E revenue) in an industry that has seen several buyouts in the 5x-10x EV/Revs. It also has a solid management team and a history of growing the top line while cutting expenses.

Overland's strategy is to provide a complete suite of products to meet the needs of their channel partners and ultimately the needs of their target market, the hyper-growth SMB market, and eventually compete upstream for additional market share. Since Eric Kelly has taken over the company, the focus has shifted from an OEM strategy to a branded products focused strategy to leverage the company's valuable channel as well as its operating system. Their product suite has grown from just tape products to a robust product line that encompasses near line storage to archival (the cloud). The only company to now have Scale-out NAS, Scale-out SAN (Block), VTL, and Tape.

Overland’s latest product revolution completely eliminates the need to provision storage capacity. This is a breakthrough product for the industry. Until now, storage required provisioning – allocating specific amounts to different groups, units or divisions of a company. When one unit ran out of capacity, more storage would need to be purchased, or existing storage re-provisioned. This means additional cost, time and management effort. Now, with Overland’s new DynamicRaid technology, storage capacity can be used as needed, with no provisioning concerns.

DynamicRaid is a new standards-based technology that delivers the ability to easily increase capacity, expand storage pools, create limitless volumes in seconds, grow and shrink storage volumes independently and optimize data protection levels--all with zero downtime. DynamicRAID provides the flexibility to manage storage infrastructures without manual intervention, giving businesses the ability to grow without interruption. Storage volumes can automatically grow, or shrink independently to add storage back into the common storage pool in seconds.

Furthermore, Overland’s SnapServer technology enables storage environments to effortlessly scale without downtime while ensuring maximum data protection. It’s 100% compliant with Windows Active Directory and complete integration with Windows, UNIX/Linux and Macintosh environments. It offers the ability to expand and upsize with minimal effort, and can be managed remotely.

The combined DynamicRaid and SnapServer technology lets any size business run its storage like an enterprise, at significantly lower cost.

Terri McClure, senior analyst at Enterprise Strategy Group states:

"Many businesses are finding it difficult to acquire and manage the storage capacity and functionality needed to keep up with accelerating data growth over time. The speed of provisioning in virtual server environments has stressed the storage infrastructure and it's essential that storage solutions match that speed and ease to keep up with rapidly changing dynamics. DynamicRaid makes provisioning capacity and the management and protection of data extremely simple, plus it automates the growing of shared storage capacity while improving the predictability of future storage needs and capital expenditures. SnapServer DX enables businesses to count on improved storage utilization with less management and a highly efficient storage environment at a fraction of the typical cost.”

Even Overland’s bread-and-butter tape products look good. As stated above, Overland is the largest provider of tape storage in the market, by far. Now, there’s nothing sexy or glamorous about tape, but it's here for the foreseeable future, and the demand is growing dramatically. Research from analysts at Enterprise Strategy Group indicates:

"Tape is the predominant storage media used for data protection due to its portability and, from an acquisition cost perspective, its price." As tape capacities continue to out-ship disk capacities and "the use of tape now dominates archiving over internal disk, external disk or cloud ... tape's lead is expected to grow during the next five years, demonstrating 45 percent annual growth by 2015."

This change in focus has put Overland back on the path to profitability. It also makes the company a likely buyout target within the next 9 to 12 months. Our price target is $7.50.

Source: Overland's Settlement With IBM And Dell: Just Icing On The Cake