Clinton Group Sends Letter to Violin Memory Board, Urges Sale
December 19, 2013
Board of Directors Violin Memory, Inc. 4555 Great American Parkway Santa Clara, CA 95054
I write on behalf of the Clinton Group, Inc., the investment manager to various funds and partnerships (“Clinton Group”) that own a meaningful stake in the common stock of Violin Memory, Inc. (“Violin Memory” or the “Company”).
I write both to thank the Board for its recent action in terminating Don Basile as Chief Executive Officer and to urge the Board to take the next logical step.
Mr. Basile deserved to be fired. In addition to the surprising and substantial financial and stock under-performance since the initial public offering, Mr. Basile was properly held accountable for significant strategic and operational missteps, including the failure to preserve the HP partnership, undisciplined growth in operating expenses and poor execution on sales. We also believe Mr. Basile's decision to attempt to compete with multiple, multi-billion dollar global storage and information technology companies, such as EMC and NetApp, as a single-product, independent public company was a fundamental strategic error.
Clearly the stock market has serious concerns about the performance and strategy of the business. With a stock price of just $3.50, investors seemingly believe the Company is in trouble or that its prospects - valued in the IPO market at $9.00 per share just three months ago - have been permanently impaired.
We too are worried about the prospects of the Company as a standalone entity, but believe Violin has very valuable technology and products. Violin is a technology leader in the all-flash array market, selling the best performing all-flash array systems, with as many as 280 terabytes in a rack with performance of over two million IOPS. The Company's patent portfolio (of 21 issued patents and 55 applications) around this technology also provides a competitive moat. We believe these products, and the portfolio of intellectual property, can be exploited to generate significant value over time for the right owner.
But time is of the essence. The Company cannot continue to burn cash at its current rate. Even with its strong cash position, the cash burn would require the Company to access the equity markets in the not-to-distant future to bridge the Company to profitability. Given Violin's public equity market performance to date, such an endeavor is a fool's errand. Nor does pursuing further the standalone strategy make sense, given the emerging competitive dynamics of the industry. Moreover, it will likely take many months or quarters to recruit a new CEO capable of executing such a strategy. In the interim, the Company is at risk of falling behind competitively.
No, now is not the time to double down on the “independent public company” route that Mr. Basile mapped out. Now is the time to invite and accept strategic interest in buying the Company. We firmly believe the Company's technology can best be exploited - and create value for today's shareholders - by putting it in the hands of an industry player with an existing global sales and marketing infrastructure and an established customer base. We are hard pressed to think of any reason why a standalone Violin can create more value for shareholders than an immediate sale to one of the established industry players.
We know, as you do, that several large technology companies have expressed an interest in buying the Company over the past year. We have been told that at least one such company made an offer to buy Violin at a valuation far in excess of the IPO valuation. It is time to revisit these proposals and re-open discussions with potential buyers. While the competitive landscape continues to evolve, there are several global technology companies that we believe remain keenly interested in the Company and in this technology. The time to approach them is now.
We believe that such a strategic buyer would be willing to pay up to own Violin's market leading technology. Our best estimate on value is that such a buyer would be willing to pay $400 to $500 million in enterprise value, which equates to approximately $6 to $7 per share on a fully diluted basis. The economics for an acquirer are, for the reasons noted above, very different than the economics of a standalone company: With the infrastructure, installed customer base and sales force in place to market the Company's products across the globe immediately upon a closing, the acquirer will measure the valuation against its own projections rather than against the Company's standalone projections or those of the sellside analysts.
Even still, the multiples paid in recent transactions in this sector more than support our valuation expectations. For example, Cisco paid a mid-teens revenue multiple to acquire WHIPTAIL in September 2013. The venture capital and private equity community similarly values comparable companies. Pure Storage, a competing flash-based storage company, was recently valued at a reported $1 billion, or over 20x estimated revenue in its August Series E funding round. Furthermore, public companies in the sector, such as Nimble Storage, trade at a similar valuation. At a $500 million enterprise value, Violin would be valued at just 5x trailing revenue and well inside of these metrics.
We have been told that Mr. Basile refused to consider seriously buyout offers during his tenure, reportedly turning away an offer of more than $1 billion for the Company. Let's not make the same mistake now. Indeed, the potential for shareholders to earn a significant premium on their stock is too compelling for the Board to pursue any path other than a sale. With multiple logical buyers, the Company should be able to create demand tension and a competitive auction, extracting a good deal for current shareholders. (In the meantime, of course, the Company should work to reverse some of the damage of Mr. Basile's recent leadership decisions and rationalize its R&D programs and optimize operations to cut the cash burn.)
Despite rough waters since the IPO, you have an opportunity to right the ship today. We encourage you to hire an investment banker, announce a sale process and timeline and get the Company's outstanding technology into the hands of a company that can put it to good work.
We look forward to discussing our thoughts with you further. I can be reached at (212) 825-0400.
Joseph A. De Perio Senior Portfolio Manager
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