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Fusion-io shareholder speaks out against SanDisk deal

SanDisk Corp. (SNDK) yesterday agreed to acquire flash storage company Fusion-io (FIO) for approximately $1.1 billion in cash, or $11.25 per share. That represented a 21% premium over last Friday’s closing price for Fusion–io stock, but 41% lower than where the Salt Lake City-based company priced its IPO back in June 2011.

Not surprisingly, some shareholders object.

One of them is Cathie Wood, the former chief investment officer for thematic investing with AllianceBernstein. She recently launched a new firm called ARK Investment Management, and believes Fusion-io is giving up way too early as a stand-alone company. Below is an edited transcript of a phone conversation with Wood, held earlier today:

Fortune: Since this deal was announced, Fusion-io stock has traded above the buyout price of $11.25 per share. What does that mean to you?

Cathie Wood: What it means to me is that those who have held the stock, and who understand Fusion-io’s positioning in the flash marketplace, can’t believe someone else isn’t going to come along because SanDisk is getting this for a steal. I think a company like Hewlett-Packard (HPQ) should be taking hard looks at this. Particularly HP because a lot of the current Fusion-io management and staff comes out of there, but HP does have its own issues trying to transform that company and this would complicate things for the next few quarters. Maybe Micron (MU) becomes the alternate bidder.

You call $11.25 per share a “steal” for SanDisk, but Fusion-io has been trading below $11 per share for most of the past year. What have the markets been missing?

I think what people have been scared of here is of the new strategy put in place when the company got new management around 14 months ago. They changed the channel strategy to a straight enterprise strategy, which should become fairly stable, and deemphasized the more volatile Facebook and Apple part. And I think that takes an awfully long time to build out. My guess is that the company was looking at another quarter where they couldn’t deliver their numbers, and it’s a very conservative management team.

I’m also amazed to see that, if you use current estimates of next year’s revenues, Fusion-io is going out at 2x revenue and SanDisk is at 3x. That’s not usually how these things work, because SanDisk is a much more mature company.

Are you going to lose money at this price? 

I’d be about even on it, because I started buying on the controversies. But I really believed that they were bringing storage into the modern age and making obsolete the hard disk drives that can’t handle the types of data feeds that need storage close to the processor. I thought it was brilliant when the last team put out the software developer kit. My mistake was in thinking that the new management would see the vision through, but when they lost [former CEO] David Flynn they seemed to also lose a lot of the company’s passion.

If there is no rival offer, will you vote in favor of this deal?

No, I wouldn’t vote in favor of it. Particularly because we won’t even get stock, even though this will make SanDisk a stronger company because it helps complete their storage stack. My dream would be to have Flynn come back in, but I don’t think that will happen since I know he didn’t expect to depart when he did. So I guess my hope is that there is no deal and this results in another sort of management shakeup. If that doesn’t happen, I guess my second choice actually would be SanDisk, even though I know I’m contradicting myself a bit.

If the deal does go through, would you buy SanDisk stock or some other pure-play flash storage company like Violin Memory?

I have bought a little SanDisk because, as I said, I think this deal could make them a stronger company. But I don’t see another pure-play flash storage play out there that interests me.

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