Two Great Tastes That... Might Taste Bad

The big buzz in the data storage industry this week is around the acquisition of ADIC by Quantum. The stated goal of the merger is to create the world's largest data protection company. Okay....

Now, don't get me wrong. I like both of these companies. The folks at Quantum are real nice and know a lot about tape backup. I even mentioned them in my book on data protection. ADIC also makes some decent and innovative products. This merger, however, leaves me cold.

To begin with, if you are an ADIC shareholder, you're getting hosed. Screwed, nailed, taken to the cleaners. Last year was a profitable one for ADIC. Net income for fiscal year 2005 was $14.27M with operating income at $4.09 on $454M of revenue. Not bad really. They made money. Contrast that with Quantum. Last fiscal year they lost $3.5M. Worse, operating income was ($9.54M) on revenues of $794.15M. There's a reason that number is in red. It's a loss.

To add insult to injury, ADIC is selling out for only $770M. That's only 1.7 times revenue. Not that high a valuation for a technology company and it's an all stock deal. That is even less exciting when you consider that Quantum's stock is only about 3 bucks a share and has traded in a narrow band between about $2 a share and $4.5 per share since the middle of 2002. There does not seem to be any share growth or profits coming out of Quantum, so what are ADIC shareholders getting for their company?

From a product perspective, the merger makes even less sense. They make the same stuff! Sure Quantum makes the tape drives that go into the libraries that both sell and ADIC has some nifty file system software. However, the role of tape in data protection is diminishing. It is quickly becoming an archive medium and not for primary data protection. Disk systems are the future of data protection. Global file space software is a good thing but so heavily tied to server systems that it is hard to imagine it having much of an impact on future revenue for the combined company. The product overlap is big enough that the combined company gets very little technology edge from this merger.

Let's recap. ADIC shareholders trade shares in a profitable company for those of an unprofitable one with no share price growth. Quantum gets more of the same from a product and technology point of view. The combined company has to cut costs and go through the merger causing all kinds of disruption. Where's the value?

The only thing that comes to mind is customers. Quantum and ADIC compete for many of the same customers. Big systems and storage vendors OEM their products and the same end-users buy their gear. Is this the justification? To add ADIC customers to the Quantum fold? Eek! I hope not. ADIC customers, faced with no ADIC, are just as likely to open up future purchases to all vendors including all the new kids on the block.

The folks who will benefit the most will be IBM, SUN, Dot Hill, etc. Sun's data protection portfolio is much better now after the StorageTek acquisition (which made sense), IBM and SUN can offer complete solutions. Even in the OEM business, an important revenue line for ADIC, this is true as competitors, large and small, run in to take the ADIC business away from Quantum. If Dot Hill doesn't have a field day with this then they are trying not to succeed.

I am reminded of an old Martin Mull bit called "Sweet Steaks". It's a fake commercial for a children's cereal. Really funny. One of the "claims" made in the piece is that when Sweet Steaks are "served with fruit and milk, it has all the nutrition of... fruit and milk." Same here. When I do the math I come up with one plus one equalling zero point 5. ADIC should have waited for a better deal.