Contact: Simon Robinson Scott Denne
Seagate finally opened up its wallet a bit, paying $694m for storage-systems company Dot Hill Systems. With an enterprise value of $645m, Seagate values the target at 2.6x trailing revenue. While certainly not an industry record (and half a turn below the median for similarly sized storage deals), it’s a 79% premium on Dot Hill’s prior-day stock price. And the purchase marks a high for Seagate, which hasn’t broken the 1x TTM revenue mark on any hardware or systems vendor in at least a decade, according to 451’s M&A Knowledgebase.
The Dot Hill acquisition marks another notable step in Seagate’s transition from an HDD manufacturer into a broader supplier of data-storage products and services. Historically, HDD manufacturers have been reluctant to develop systems-level products, lest they tread too strongly on the toes of their major server and storage OEM customers. However, Seagate has been here before – in 2000 the company acquired storage systems specialist Xiotech for $360m. This was not a successful move, and Seagate later unloaded the company.
So why does Seagate think it can succeed this time around? A couple of things have changed the dynamic and emboldened the HDD suppliers. First, there are only two major HDD manufacturers remaining: Seagate and WD/HGST (with Toshiba a distant third). This effective duopoly means that the major storage/server OEMs have little choice when it comes to sourcing their HDDs (especially if they wish to dual-source). Second, and perhaps more significant, is the fact that large-scale and hyperscale datacenter operators (Internet/cloud giants, large service providers and even some large enterprises) are bypassing traditional storage systems approaches and direct-sourcing their HDDs from the manufacturers.
Perella Weinberg advised Seagate on the transaction, and Needham & Company and Morgan Stanley advised Dot Hill. We will have a detailed report on this transaction in tomorrow’s 451 Research Market Insight Service.
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