Quantum buys ADIC for $770M

Quantum Corp. announced Tuesday night that it plans to acquire Advanced Digital Information Corp. (ADIC) for approximately $770 million, with the goal of creating the largest independent company specializing in backup, recovery and archiving products.

With combined revenues of over $1.2 billion over the last four quarters, "The new company will have an enormous set of offerings, the scale, footprint and financial foundation to really have an impact in the data protection market," said Steve Duplessie, founder and senior analyst with the Enterprise Strategy Group.

He added that StorageTek (STK) and IBM "still rule the high end, while Overland Storage Inc. hangs down low." Adding that "both [Quantum and ADIC] are in the midmarket and now get some economic advantages." The merger also makes them a "legitimate third-party alternative to STK or IBM," he said.

Rick Belluzzo, chairman and CEO of Quantum, and who will hold the same position in the combined organization, said that creating a larger company in the backup and archiving market that's independent is great for users. "There is a void there that nobody fills today … We're a good alternative for companies that want to innovate and embrace new technologies and work in a heterogeneous environment."

He added, "It was always a challenge to provide global support as standalone companies -- combined we can build that support." He mentioned the often "difficult and constrained" situation that Quantum and ADIC faced in selling to OEMs. "They hold all the cards," he said. "This deal helps us break out … It does it better for us than any situation we could see in the market place."

It does mean less competition in the market, however, but that's a fair tradeoff, according to Bob Abraham, founder and analyst with Freeman Reports. "There's less competition, but one much stronger company with a much broader repertoire of product offerings, great support and technical capability," he said.

He noted that any overlap between the product lines will be around their midrange and low-end tape libraries. "Both companies have aging products -- the natural attrition of these might be accelerated," he said. Meanwhile, Quantum's disk-based backup product, the DX Series, is more of a low-end system, while ADIC's PathLight is a high-end product with a fairly sophisticated file system. "Where both are most successful in this space, they don't compete," Abraham said. Quantum's DX Series showed solid growth up 23% sequentially in the fourth quarter, which ended March 31, 2006.

Robert Stevenson, managing director of storage research at TheInfoPro, said the deal is bad news for Sun Microsystems Inc. but good news for the midmarket. "ADIC has been gaining traction in our [latest] research, winning business from Sun as has Quantum." He added, "If they can extend their VTL [virtual tape library] capabilities with deduplication technology and improve on the scalability while also maintaining a low-cost DLT solution, it is a very attractive alternative to Sun." The key going forward will be incorporating a WAFS component into their products and embedding data encryption capabilities, he said.

During a conference call with financial analysts, Quantum's Belluzzo was asked how he viewed ADIC's reseller relationship with EMC Corp. "We view the EMC relationship as very strategic. That's the way it's operated inside ADIC. We intend to capitalize on that," he said. EMC has been reselling ADIC tape libraries since June 2004.

Financial details

Under the terms of the deal, shareholders of Redmond, Wash.-based ADIC will receive $12.25 per share in cash, or about 3.5 shares of Quantum for each share of ADIC, instead of cash.

The transaction is expected to be approximately 15 cents accretive to Quantum on a cash earnings per share basis, with annual cost savings of approximately $45 million in the first full year of combined operations, Quantum anticipates.

Based on the overlap of the two companies' businesses, savings are expected to come primarily from economies of scale and manufacturing efficiencies in cost of goods sold, reduction of duplicative operating expenses and sharing of research and development, and marketing costs. Belluzzo said he expects few redundancies.