Tag: STEC

Solid-state storage market: OEM now, M&A later?

Brenon Daly

Contact: Brenon Daly

As buoyant as the Nasdaq has been so far this year, few stocks can come close to matching the stunning 10-fold rise of STEC Inc. After opening the year at about $4, shares in the maker of solid-state drives (SSDs) inched above $40 earlier this month. Perhaps inevitably, gravity (in the form of Wall Street concern over increased competition) has pulled STEC back down over the past week. Shares closed Wednesday at $30.85, leaving the company still with a cool $1.5bn market capitalization.

In a recent report, my colleague Henry Baltazar notes that STEC is the central player in the emerging SSD segment, one that could very well change the face of the multibillion-dollar server and storage markets. SSDs are much faster and far more efficient than traditional hard drives and disk-based storage arrays. Also, the prices of SSDs have come down sharply as they have moved from costly DRAM-based to flash-memory-based drives. Taken together, the pitch of ‘better, cheaper, faster’ has spurred phenomenal growth in the SSD space. For its part, STEC’s sales are projected to hit $350m in 2009, an increase of more than 50% in the midst of one of the softest IT spending environments in recent years.

This trend, of course, hasn’t gone unnoticed by the server and storage giants. So far, however, when these companies have run the ‘buy-build-partner’ calculus for the SSD sector, most have opted to partner. STEC, for instance, has OEM deals in place with nearly all of the major server and storage players, including IBM, Hewlett-Packard and a longstanding accord with EMC. As mentioned, though, competition is heating up as startups look to get established in this fast-growing market. New companies entering the space include Pliant Technology and SandForce (neither of which has announced any OEM agreements of its own so far), plus Fusion-io, which has OEM deals with HP and IBM, as well as reseller agreements with Dell and other vendors. If the SSD market continues to take off, we could certainly imagine one or more of these startups getting snapped up.

WDC goes SSD

-Contact Thomas Rasmussen

The market for solid-state-drive (SSD) technology is heating up. As an increasing number of consumer and enterprise products (including servers, desktops, laptops and netbooks) incorporate the technology, some old-line technology companies are looking to expand their SSD offerings. Western Digital acknowledged that last week by acquiring SSD vendor SiliconSystems for $65m in cash after about a year of on-and-off talks. (It was Western Digital’s first purchase since its $1.14bn acquisition of Komag in mid-2007.) On the other side, SiliconSystems had taken in just $14m in venture capital since its inception in 2002 from Miramar Venture Partners, Rustic Canyon Partners, Samsung Ventures America, Shepherd Ventures and SanDisk.

We understand that SiliconSystems generated about $50m in trailing 12-month (TTM) sales, meaning Western Digital paid about 1.3x TTM sales for the startup. This is in line with historical averages for the space, but comes at a time when the median valuation for venture-backed startups has been nearly cut in half. In the first quarter of 2009, the median valuation in a sale for a VC-backed tech company sank to just 2.1x TTM sales, compared to 3.8x TTM sales during the same period last year. (See our full report on first-quarter M&A.)

SiliconSystems will be re-branded as Western Digital’s Solid-State Storage business unit and will be headed by former CEO Michael Hajeck, who used to run STEC Inc’s enterprise SSD division. The importance of this relatively small acquisition should not be underestimated. Having essentially become a player in the SSD space overnight, Western Digital has taken the first step toward securing its future survival. With $1.4bn in cash, we wonder if Western Digital will continue to use acquisitions to expand in this market. Possible targets are Hajeck’s former employer STEC, which we previously speculated might be on sale, as well as Smart Modular Technologies. There are also a few potentially disruptive startups out there worth looking at such as Pliant Technology, Texas Memory Systems and Fusion-io.

Western Digital M&A

Date announced Target Enterprise value Price to sales multiple
March 30, 2009 SiliconSystems $65m 1.3x*
June 28, 2007 Komag $1.14bn 1.1x
July 24, 2003 Read-Rite $172m 1.0x

Source: The 451 M&A KnowledgeBase *451 Group estimate