Seagate Buys Dot Hill For Massive Premium: What You Need To Know

In a report published Wednesday, Piper Jaffray analyst Andrew J. Nowinski downgraded the rating on Dot Hill Systems Corp. HILL from Overweight to Neutral, while raising the price target from $9.00 to $9.75, following the announcement by Seagate Technology PLC STX that it was to acquire Dot Hill for $9.75 per share.

"We believe the acquisition benefits both companies, as Dot Hill can lower costs by leveraging Seagate's HDD infrastructure, while Seagate can now move upstream into the system market without creating new competition with (existing storage) customers," Nowinski said.

The deal is expected to be approved, with completion expected in Q4. In addition, the acquisition price represents an 88 percent premium to Dot Hill's closing price on August 18, 2015 and 50 percent higher than the stock's price over the past three months, valuing the company at a total of $645 million, excluding the $49 million that the company already has in cash.

"We believe the offer is reasonable, as Dot Hill is of the few companies delivering mid-teens revenue growth and 40%+ earnings growth," according to the Piper Jaffray report.

Given that the deal is to be financed using Seagate's existing cash balances, the analyst mentioned that the transaction would not be subject to any financing conditions.