EMC eyes consumer storage

May 1, 2008: 9:29 AM ET
Iomega's Rev drives compete with portable hard drives from Seagate and Western Digital; EMC hopes to buy the company and turbocharge the brand. Image: Iomega

What happened to Iomega (IOM)?

It was a gravity-defying technology stock during its best run a decade ago. At its peak in 1996, the company's nearly $6 billion valuation meant many investors were betting it would be the future of digital storage.

Iomega seemed to be at the right place at the right time; broadband connections and music downloads were not yet common, and few tech companies recognized that storage would be a growth market. Meanwhile Iomega's proprietary Zip disks and Zip drives provided the capacity of a computer hard drive and the portability of a floppy disk, making it a snap to move chunky files like digital images or huge spreadsheets from one PC to another.

It wouldn't last. Even before the dot-com bubble burst, consumers found reasons to ditch the San Diego company. New e-mail services were making it easier to transfer text files to another computer, and CD-burning drives were making it cheaper to swap images and music. By early 2000, when other tech stocks were just starting their slide, Iomega had already fallen to a quarter of its peak value. Its attempts to sell more standard fare like hard drives and MP3 players didn't help much; the stock's slide continued into this year, as SD cards, Apple (AAPL) iPods and flash drives redefined the storage game. Iomega has been trading near $4 per share, giving it a bargain-basement valuation under $250 million.

That's when EMC (EMC) smelled opportunity. The Massachusetts storage and security firm has a healthy business selling services to larger companies, but is clueless about how to attack the growing consumer market, which is generating 70 percent of new data. That's why EMC last month bid $213 million for Iomega, 20 percent more than it initially offered to pay.

EMC believes that the Iomega brand, paired with EMC's global reach, will be able to capture consumer storage market share in places like Asia, where Iomega is weak; and in the United States, where it has been out-dueled at retail by companies like Seagate (STX) and SanDisk (SNDK). EMC certainly has the financial firepower to make an impact with the Iomega brand –- its $32 billion market capitalization is three times bigger than Seagate's and five times that of SanDisk. But it's still not clear whether an EMC-backed Iomega will succeed where Iomega failed alone.

To improve the odds, EMC executives are already crafting a marketing plan to boost the Iomega brand, assuming the deal passes shareholder muster. (Iomega's management supports the bid, and EMC's tender offer for Iomega shares concludes May 21.) After that, we'll see if EMC's backing helps Iomega reclaim its old Zip.

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