Hedge Funds Were Bullish on Dot Hill Systems Corp. (HILL) Before Deal with Seagate Technology PLC (STX)

Yesterday,  Seagate Technology PLC (NASDAQ:STX) has announced that they will purchase Dot Hill Systems Corp. (NASDAQ:HILL) for $9.75 per share, which represents a 50% premium to Dot Hill’s average share price in the three months prior to the announcement; the total value of the deal amounts to $694 million on a fully-diluted equity basis. According to Seagate, Dot Hill products will be included into its storage and cloud systems products. Seagate also specifically pointed out to Dot Hill’s intellectual property portfolio, which it aims to use particularly in dealing with original equipment manufacturers.

Dot Hill Systems Corp. (NASDAQ:HILL)’s board is said to have already unanimously approved the proposed deal, expected to be closed at the end of 2015. Seagate Technology PLC (NASDAQ:STX) is reported to be using its existing cash, which means that the deal will not be subject to any financing terms. Dot Hill is anticipated to trim its costs, benefiting from the economies of scale of its future parent, while Seagate snags an entry into the upstream market without introducing another company that would over crowd the market.

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Nonetheless, as usual, Insider Monkey not only looks at the latest news about firms like Dot Hill Systems Corp. (NASDAQ:HILL), we discuss how hedge funds have been treating these companies. We think that hedge fund sentiment surrounding a stock is an important metric, because our research showed that in this way a smaller investor can generate market-beating returns. However,  we discovered that the most popular large-cap picks of hedge funds underperformed the S&P 500 Total Return Index by seven basis points per month between 1999 and 2012. On the other hand, a portfolio of their 15 most popular small-cap ideas beat the  by nearly a percentage point per month on average during the same period. In forward tests since August 2012, these top small-cap stocks beat the market by an impressive 66.5 percentage points, returning over 123 % (read more details here). Hence, a retail investor needs to isolate himself from the herd and take advantage of the best growth opportunities in the market by concentrating on small-cap stocks.

According to our data, it looks like hedge funds anticipated that Dot Hill will gain more ground as they have been bullish on the stock since the beginning of the year. During the second quarter, the number of investors with long positions (from our database) went up to 23 from 14, while the aggregate value of their holdings surged to $44.87 million, which represent around 14% of Dot Hill’s outstanding stock. Jim Simons’ Renaissance Technologies ended the second quarter with the biggest position in Dot Hill Systems, owning about 3.3 million shares, up 27% from the preceding quarter.

On the other hand, Seagate Technology PLC (NASDAQ:STX), saw an outflow of capital during the same period, as there were 35 hedge funds at the end of June, down from 39 a quarter earlier. The value of their funds’ positions declined to $614.84 million from $654.46 million over the quarter. Iridian Asset Management, led by David Cohen and Harold Levy, held 3.48 million Seagate shares at the end of the June.

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