Dot Hill, Gains, and Rethinking Tech M&A (HILL, NTAP, ORCL, HPQ, DELL, EMC, CSCO)

Dot Hill Systems Corporation (NASDAQ: HILL) is finding itself back in favor this morning.  The company has aspects of the cloud for investors but it is more for storage solutions, software, and security for service and equipment providers, carriers and telecom companies, and government agencies.  The stock has hit a new 52-week high and we can’t help but wonder if it could be back in play as storage and networking companies look to consolidate.

This morning the company raised guidance to $65 million to $65.5 million in revenues versus a prior target of $58 million to $62 million for the quarter.  Non-GAAP earnings are now expected to be positive at $0.02 to $0.04 EPS versus a prior forecast of a -$0.03 EPS t $0.01 EPS.  It now sees non-GAAP gross margin of 21% to 22% rather than a prior target of 19% to 20%.  It even expects to have seen its cash grow, for the first time in a long time, to $45.7 million from $41.8 million a quarter earlier.

Here is where this story gets interesting and why we wonder if a potential buyout could come into play (again, sort of).  Despite its intentional early termination of its NetApp (NASDAQ: NTAP) agreement in December, Dot Hill saw strength in all geographies and sales channels.  The company is seeking to expand its gross margin and is looking to reach a level of sustained profits.  The forward quarter will have the same impact ahead as before since its NetApp deal was terminated.

It has been years since Dot Hill’s stock was ramping exponentially.  There was a time when Sun Microsystems was on an acquisition spree and Dot Hill was one of a dozen players that some saw as possible targets, but now we know that Oracle Corporation (NASDAQ: ORCL) owns Sun. We have seen companies like Hewlett-Packard Co. (NYSE: HPQ), Dell Inc. (NASDAQ: DELL) and even EMC Corp. (NYSE: EMC) make a steady round of technology and services buyouts in recent months.

Dot Hill is up over 14% at $2.16 this morning and shares hit a high of $2.20 today.  Now it has a trading range of $1.01 to $2.20 for the last year and its market cap after today’s move is almost $120 million.

Picking any target in tech M&A, whether storage or networking, is a complicated process with many caveats.  First and foremost, there has to be a group of interested buyers.  Then you must have a management team that is either willing to sell at a reasonable price or one that can be booted easily in a hostile deal.  Then come the issues around compatibility, integration, and the ability to leverage the sales.

Today’s news alone won’t make Dot Hill more of a buyout target.  A culmination of new developments on top of today’s good news might.

JON C. OGG