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Struggling Fusion-IO lost its CEO and CFO last year, but has $1M+ contracts with over a dozen enterprise clients

Milpitas, Calif.-based SanDisk Corp. (SNDK) has announced a major acquisition -- a $1.1BUSD purchase of Fusion-IO, Inc. (FIO).  The move strengthens the ongoing war for enterprise business that SanDisk is waging against some of the world's top semiconductor firms.
 
I. SanDisk: A Fabless Flash Pioneer
 
The roots of SanDisk lie in 1988.  That year, Intel Corp. (INTC) released the first commercial NOR storage -- the 64-kilobit (8-kilobyte) 27F64 module and the 256-kilobit (32 KB) 27F256 and 28F256 modules.  The size of the shoebox, these bulky products used a new memory we know today as "flash".  Intel boldly proclaimed that the new memory would one day supplant EPROM (cheap, but only one write) and EEPROM (expensive, but supported multiple writes) in the nonvolatile storage market. 
 
SanDisk was perhaps the first true flash memory startup, or at least the most successful.  Found in 1988 by Eli Harari, Ph.D and Sanjay Mehrotra -- both veterans of Intel -- plus Jack Yuan, a Hughes Electronics veteran, SanDisk was a pioneer in a number of flash segments including pushing the format for digital photography and storage sticks.
 
After being fabless for much of its early existence, SanDisk flirted with fabricating in the late 1990s and early last decade.  In 1997 it invested $40M USD in a United Microelectronics Corp. (TPE:2303) fab in Taiwan.
 
And in 2000 it partnered up with Toshiba Corp. (TYO:6502), a Flash fabricator with which it had a growing relationship.  Toshiba's development of flash memory was more or less as old as Intel's.  While it was narrowly beat to market by Intel, Toshiba correctly prophesied the market would shift towards NAND Flash, which had slower read times than NOR flash, but higher densities and higher write/erase speeds [see: NAND vs. NOR Flash].
 

SanDisk

SanDisk continued to jointly operate fabs with Toshiba until 2009 when it divested itself fully from its remaining fab assets, going fully fabless.
 
II. Number One USB Stick and PC Card Maker Eyes Enterprise
 
That move proved a crucial one as the flash market recently sustained a major downturn after South Korea's Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) leveraged its fabrication expertise to unforgivingly permeate the market with low-cost NAND chips, a move that has sunk many of its rival fabs to losses.  While the market has since rebounded, the Flash fabrication business remains volatile and always trending towards lower prices.
 
Thus the fabless SanDisk is not only contending for the title of the flash market's most powerful player, but it is one of its most stable firms.  With an intellectual property portfolio of 4,900+ patents -- mostly on NAND flash storage technologies -- it owns perhaps the strongest flash-centric portfolio outside of Toshiba and Intel.
 
SanDisk narrowly escaped a $5.85B USD hostile takeover bid from Samsung in 2008.  Having almost doubled in value in the last year, it now has a market cap of roughly $22.9B USD.  SanDisk pocketed over $1B USD in net profit last year, as the market rebounded.
 
According to Gartner, Inc. (IT), SanDisk in Q1 2014 was the top seller of USB flash memory sticks and PC flash memory cards.  It was also a strong contender in the SSD market.
 
The Fusion-IO acquisition plays nicely into SanDisk's ongoing efforts to tap into the lucrative enterprise market, which features higher premiums on hardware than consumer electronics.  Among its recent acquisitions include:
  • 2011
    • Pliant Technology, Inc. -- enterprise SSD maker
  • 2012
    • Schooner Information Technology, Inc. -- enterprised targeted Flash database tech
    • FlashSoft Corp. -- a leader in Flash caching technology
  • 2013
    • SMART Storage Systems -- another enterprise SSD maker
Still, the pickup of Fusion-IO is one of the largest moves by SanDisk to strengthen its position in this market via acquisitions.
 
III. Fusion-IO -- Great Promise, But Can SanDisk Stop the Bleed?
 
Founded in 2005 as Cottonwood Technologies in Nevada, the firm eventually moved to Cottonwood Heights, Utah and in June 2006 was rebranded as Fusion Microsystems.  It raised roughly $111M USD in three rounds of venture capital funding before going public in 2011 with a valuation of nearly $2B USD.
 
Since then shares have been on a general downward slide, which has been exacerbated by a string of high profile defections.  In May 2013 Fusion-IO lost co-founders David Flynn (CEO) and Rick White (CMO).  And in Oct. 2013 Dennis Wolff, Fusion-IO's CFO also called it quits.
 
Still, Fusion-IO's technology --based on its 2007 ioDrive concept -- remains a valuable assets in the enterprise segment, accounting for the company's $432M USD in revenue last year.  Fusion-IO lost money on a GAAP basis last year, but it also ended the year with $238M USD in cash and key relationships with the likes of Hewlett-Packard Comp. (HPQ), International Business Machines Corp. (IBM), Facebook, Inc. (FB), and Apple, Inc. (AAPL).  In its Q2 2014 earnings report, Fusion-IO revealed it had $1M+ USD contracts with a total of twelve Silicon Valley firms.
 
A top goal for SanDisk will be halt the alarming pace of employee poaching which has seen much of the company's brightest talent jump ship to other firms -- including it own partners like Facebook.  SanDisk will also look to patiently grow Fusion-IO's relationships with its numerous enterprise clients.
 
Samsung flirted with acquiring Fusion-IO and was an early investor during its venture capital rounds.  Time will tell whether the bid -- which was a modest 21 percent premium on share prices ($11.25 USD/share versus Friday's closing values of around $9.30 USD/share) -- will pay off for SanDisk.  But SanDisk's savvy and long track record suggest the partnership should bear fruit.

Source: BusinessWire





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