Whither Iomega?

One problem with carving out a successful market niche is that sometimes you attract unwanted suitors. Iomega, which manufactures portable data storage solutions, now finds itself in such a position, so its future is unclear.Iomega produces an assortment of removable data storage devices, network attached storage, data recovery products, and managed security services for small and midsize businesses as well as consumers. With computers becoming more powerful, the number of federal regulations increasing, and the amount of network bandwidth growing, small and medium enterprises find themselves in need of more storage solutions. Like other companies in this space, Iomega has been seeing an increased need for its products. In February, the company reported net revenue of $336.6 million and net income of $10.1 million for 2007, compared to $229.5 million with a net loss of $8.8 million in 2006.

The sterling numbers underscore a dramatic turnaround by the company, which has experienced many ups and downs in its 28 year history. At the turn of the millennium, the storage supplier was riding high as one of the pioneers of popular zip drives. But the company made bad business decisions, betting its future on proprietary rather than open products, and zip drives lost their luster as smaller, simpler, less expensive storage solutions emerged. Iomega retooled its line with network storage systems for small and medium enterprises, whose revenue increased 76% in 2007, and new consumer storage solutions, which generated an 86% rise in the same time.

As the new products took root, the vendor decided to acquire ExcelStor, which designs and manufactures hard disk drives, security storage and external storage. The company generated $371 million in 2007, and Iomegas plan was to transform itself into a $1 billion business. But its recent success caught the attention of EMC, which has been aggressively gobbling up storage suppliers during the past few years, and offered to purchase Iomega at a price that was 22% higher than its current trading value. EMC was probably attracted in part by Iomegas stock price, which at about 16 times expected earnings per share was lagging in the Computer Storage & Peripherals sector, where most companies are valued at multiple of about 24 times their earnings per share. Iomegas board of directors rejected the offer this week, but EMC could come back with another one.

Regardless of how its future unfolds, Iomegas next decision represents good news and bad news for small and medium businesses. The good news is the company should gain business depth and muscle once the transaction is completed. The bad news is there will be period of management turmoil as the new entity takes shape, and that often leads to less attention to customers in the short term.

Do you use Iomega products? What has been your experience with the company? What has been your experience with vendors that have gone through a merger or acquisition?