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Will Quantum Make the Leap to EMC? | The Money Times

Money Matters - Simplified

Will Quantum Make the Leap to EMC?

 The market doesn't quite know what to make of Quantum(NYSE: QTM) these days.

 

 The stock has been on a veritable rocket ride for a couple of months, more than tripling since mid-August, and breaking new two-year highs in the process. But the business is not terribly strong, as evidenced by last night's second-quarter report. Revenue fell 4% year over year to $168 million, and GAAP earnings were drawn and quartered to $0.01 per share. Today's substantial price swings don't seem at all appropriate after a report like that.

Still, the company works in the enterprise storage market, where hungry giants EMC (NYSE:EMC) and Hewlett-Packard (NYSE: HPQ) have been known to make a meal out of smaller storage specialists in recent history. EMC has been particularly hungry, pushing asideNetApp (Nasdaq: NTAP) to reach data deduplication veteran Data Domain.

In that light, Quantum looks like a tasty target because of its focus on deduplication software and large-scale tape backup systems. In addition, the company has a long history of working closely with EMC, and even owes the bigger company $122 million in term notes. One could certainly jump to the conclusion that EMC would get a particularly sweet deal out of something more than a partnership.

I wouldn't hold my breath waiting for that buyout bid, though. Quantum's business is not particularly strong, and some would even call it "faltering." Sales are falling, profits are down, and cash flows are suffering, too. The company does have a potentially strong product launch coming up in the next few weeks that might plug the gap of lost backup and deduplication sales over recent quarters, but the proof will be in the pudding.

In the meantime, we're looking at a richly valued stock with a weak balance sheet and feeble cash-generation powers. I don't see why EMC or anybody else would want to stick a buyout premium on top of Quantum's hasty price increase -- they're more likely to wait for the stock to fall back to more reasonable levels before making a move. I'd suggest that you do the same, dear Fool. There are much more tempting storage opportunities available in today's market.

© 2010 UCLICK L.L.C.


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