Tape Backup Giant Quantum Adds Muscle by Acquiring Certance

Although backup behemoth Quantum has retained a hefty market share with its highly regarded DLT-based tape backup products since its 2001 hard-drive business sale to Maxtor, the company has been challenged to deliver a consistent profit to its shareholders--a problem fairly common in the tech industry post-Internet bubble.

Quantum has been taking steps to improve the situation. For example, the company says it has tightened its belt and dropped its second-quarter operating expenses by about US$9 million, to US$58 million, compared with the same period last year. And although Quantum continues to promote further efficiency, cost reductions go only so far. A business running at even a modest loss in tough times often needs to make strategic moves to balance the books and continue to grow.

So if you need to add profit, why not add a solidly profitable company to your portfolio? Enter Certance, a company that grew up out of the former tape backup division of hard-drive titan Seagate Technology and that currently holds the volume lead in tape drives.

For the backup savvy, Quantum's acquisition announcement last week seemed a natural choice. Quantum lays out a strong case: "Certance has been making money steadily for the last three years," says John Gannon, president and chief operating officer of Quantum. "This acquisition will immediately begin to strengthen Quantum's business." It will also add additional breadth to Quantum's product offerings.

Expanding Offerings

Quantum serves predominantly the middle range of the backup market and currently offers a variety of DLT-based tape products, featuring capacities from about 80GB to 600GB of compressed data per cartridge. The company also sells tape autoloaders and libraries along with disk-based backup systems. Recent innovations include DLT-ICE, which allows DLT tape drives and cartridges to use write-once-read-many functionality to surpass the requirements of recent legislation such the Health Insurance Portability and Accountability Act and the Sarbanes-Oxley Act.

Certance serves mostly the entry-level segment but has a wide array of tape offerings, including LTO products, which range in capacity for compressed data from 200GB to 800GB per cartridge. It is a major vendor of DDS models, with per-tape capacities from 24GB to 72GB, along with 20GB and 40GB Travan tape models. Certance also markets tape automation and disk-based backup solutions.

Both companies do a healthy business in media for their various drives.

Compatibility a Recipe for Success

The merged product lines should provide a synergistic combination. "This rounds out our portfolio," Gannon says. "No one in our business will be able to have this kind of breadth now or in the future."

Gannon says that he expects the acquisition approval to go smoothly and thinks it will take from 30 to 60 days to pass regulatory muster and be finalized. Quantum will pay US$60 million in cash for Certance (excluding US$34 million of cash reserves, which will be retained by the sellers). On completion, the company expects to fully integrate Certance into Quantum. Branding issues remain to be settled, but the merged company will definitely carry the Quantum marque. Certance generated revenue of US$225 million in the last fiscal year, ended in June; Quantum pulled in more than US$800 million in its fiscal year ended in March. The result of the combination will be a US$1 billion company.

Merging two companies can add efficiencies beyond just the addition of product lines. Redundant offerings, infrastructure, and staffing can typically be reduced, although Quantum says that--as with the branding issues--it's not ready to make announcements in this area. No changes at all will be made until the sale goes through. "We can't begin to implement anything until the approval period is complete," Gannon says. However, both companies' customers have expressed a desire to strategically combine technologies and products as needed to provide the right balance of protection and cost, Gannon says, further indicating that Quantum will preserve Certance's product offerings. Quantum will continue to take advantage of Certance's strong distribution channels.

Considering the tack that Quantum is taking, customers should be satisfied with the results of the merger. Although some familiar products will soon be delivered under an unfamiliar brand, it will be easier than ever to mix and match the products that customers need to implement an effective backup strategy. The company notes that even though some products (such as the Travan lines) have declining markets, Quantum still considers them important--so there should be no unhappy surprises for buyers. And going forward, it should be easier for consumers to plan future purchases with the bulk of their backup products coming from a single source.

Future Outlook

Despite recent dips in the IT industry, certain factors tend to promote an optimistic outlook for Quantum. For one, the market for business backup products has historically been relatively stable. The needs of the company's customers are hardly shrinking. Businesses are contending with increasingly complex information-storage environments, and the sheer volume of data requiring backup is escalating rapidly. That situation adds up to a bright outlook for this merger and for Quantum going forward.

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