Seagate Technology ($STX) bought Dot Hill Systems ($HILL) last night for $694 million, surprising Wall Street and driving shares up 86%. A quick review of analysts covering the stock showed nearly all had buy ratings, and price targets around nine dollars per share - but none figured this quick gulp by Seagate. I think it speaks more to the shift required by this longtime hard drive maker, and an acceptance that cloud valuations may be misunderstood by analysts.
The first thing to understand is that Seagate is down 25% this year, and if they didn't do something, they would likely have Q4 exits for tax loss selling by portfolio managers. Even with the purchase, shares will be under pressure – but may keep longtime holders around. More importantly, they have a reason to keep the short sellers away. Consider the potential of cloud revenue that causes a PM to think twice, and then the premium starts to make sense…but it may only make sense for Seagate in the sector.
Seagate traded as low as three dollars per share in 2009, and near $70 at the highest point last December, so holding it around $50 would be a victory for the company and shareholders. The trick will be to integrate Dot Hill.
What Does Dot Hill Do?
Dot Hill designs, manufactures, and markets a range of software and hardware storage systems for the entry and mid-range storage markets worldwide. Its storage solutions consist of integrated hardware, firmware, and software products employing a modular system that allows end-users to add various protocol, performance, capacity, or data protection schemes.
The company sells its products primarily through server-based original equipment manufacturers, distributors, resellers, value added resellers, and federal contractors. Dot Hill Systems Corp. was founded in 1988, and is headquartered in Longmont, Colorado.
Wall Street analysts will need to reconfigure the spreadsheets after today's 86% premium. So take it upon yourself to understand that cloud stocks will be a factor in Q4 as we hold up the market with M&A and this bull market continues to defy gravity.
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