Enduring some major restructuring and surviving the significant upheaval that resulted from an ill-fated $350m acquisition in 1994 of Digital Equipment’s sickly storage business, Quantum Corp now boasts a healthy dominance in the storage market. It has 22% of the desktop drives market and a 43% slice of the trade in Digital Linear Tape (DLT) with a tape business that looks to have become a rising star. So much so that the company is set to throw another $300m at its fledgling tape division, offering to takeover automated tape library (ATL) manufacturer ATL Products of Irvine, California. DLT technology, which it acquired as part of the deal with DEC, has rejuvenated the tape storage market over the past couple of years. Despite increased competition from removable magnetic storage products, the worldwide tape drive storage market saw growth of 15% again last year. And according to market forecasts made by IDC, this trend should continue this year when sales are expected to touch $3.1bn, a sector from which Quantum was drawing $728m 1997, with incomes from its DLTtape products this year expected to surpass $1bn. The DLT tape option has become the de facto standard among users of ‘midrange’ automated tape libraries. This covers backup and archival needs of everything from small departmental LANs to corporate client-server networks. As with stand-alone tape drives, the primary application for automated tape systems is backup/archiving. Other applications include near-online storage, information archiving, data collection, remote vaulting (critical for disaster recovery), tape arrays, and image and video storage and distribution. DLT offers the right mix of data integrity and price-performance. It’s reliable, and it’s fast. It’s less expensive than disk, it’s reusable and can withstand many read-write cycles and, as part of an automated tape library, is supported by some pretty well- developed robotic handling technology. The deal with Quantum gives ATL Product’s shareholders only a 17% premium over Tuesday’s closing price of $29 for a stock that has risen nicely over the past few months. Whether or not this is sufficient compensation for becoming involved in Quantum’s slower moving share price will be for them to vote on in due course. According to sources at ATL Products, the deal had been negotiated and renegotiated over a period of 3 months, during which time ATL Products stock had climbed steadily (presumably on the back of takeover rumors) from around $14 a share to its current levels. Taking this into account (that the price of ATLP stock had partly been talked up by takeover speculation), it seems that fair value for ATLP shares would actually be around $18 a piece – which makes Quantum’s bid of $29 start to look half reasonable.
Low on working capital
Whatever the case, we hear the tape library company had set itself a target price, and that Quantum’s bid ‘meets and exceeds that’. Quantum’s revenues have grown by a compound 33% since 1993, but this has slowed to just 20% in the last year, due in part to the immense difficulties encountered in the disk drive market, where all the big players have been slashing prices to off-load inventory. In contrast, though it was starting to run low on working capital, ATL Products has regularly been able to grow revenues by 50% annually and was expecting to touch a $100m run rate this year. The company has, by Quantum’s own admission, a robust and highly successful business model. So much so that 350 strong ATL Products will be left alone to operate as an arm’s length subsidiary, with the management team left intact so that it can take Quantum’s tape-automation business under its wing. Currently ATL covers the high-end and mid-range business while Quantum covers entry level systems. This fit, says Chet Baffa, ATL Product’s VP for marketing and sales, is the primary reason behind the company accepting Quantum’s offer. It gives us a way to plug a big hole in our product line, he told us referring to Quantum’s low end DLTstor. This is a part of the market noted for its high volume shipments, and a segment with most immediate exposure to what is expected to become a booming NT market. The deal offers great market opportunity. Not to mention access to Quantum’s distribution channel, its financial backing, and its huge presence in the market, Baffa remarked. Quantum’s existing DLT customers include ADK, Breece Hill, Emass, Exabyte, Overland and Phillips – as well as automated tape library rivals ATL Products and StorageTek, one account it looks likely to lose once it assimilates its purchase. Though Quantum will no doubt look to continue servicing through its ATL subsidiary the balance of OEM and VAR business the Irvine-based library manufacturer has established with the likes of Sun, EMC, Siemens Nixdorf, Compaq, Hewlett-Packard, Ausplex and Data General. In the field ATL Products systems are already installed at more than 4,000 locations, with its products being used by more than 50% of Fortune 100 companies. Among users of its automated tape systems it counts BMW, KPMG, British Airways, and GoldStar. Users of tape libraries are drawn to the notion of storing data on magnetic tape at only a tenth the cost of saving it to disk. It means that for remote vaulting or deep archive backup there is probably no better choice than a DLT library. As such, there’s probably a role for tape systems in most organizations. Disaster recovery for SAP, as an example, is becoming a number one priority among Global 2000 firms. In fact, ERP’s visibility in many companies is freeing budget for high-end disaster recovery solutions such as ‘fail over’ using mirroring, and 2-4 hour recovery using remote vaulting and ATLs. In other areas of business, applications that exploit data warehousing have prompted a huge growth in the need for online and off-line storage, as decision support and data mining software users have sought to query hundreds of gigabytes of historical corporate data. Elsewhere, companies have been building vast databases of customer transactions to feed their call centers with years of customer histories. And all the while the rise of the internet and intranets has triggered the need to hold huge amounts of complex data. Content is everything, and reliable backup and archival have become critical. Huge volumes of corporate information are being digitized; what with multimedia presentation files, file downloads of audio and video images from the Internet, it all calls for acres of storage media. Analysts project that the mid-range tape automation market has the potential to grow at around 40% annually in the near term. It’s an opportunity Quantum is keen not to let pass it by. This acquisition increases the scope of our existing $90m storage systems business, Michael Brown, Quantum’s CEO has stated. Once Quantum integrates its automation-products business into the ATL Products purchase, based on current market projections it has the potential of becoming a $300m business during 1999.
M&A Impact.
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