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Back-to-Back Acquisitions for IRM

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Information storage and management service provider, Iron Mountain Inc. (IRM - Free Report) recently announced that it has acquired File House Offsite Record Storage, Document Systems Inc, and First National Safe Deposit. However, the terms of the transactions were not disclosed.

File House Offsite Record Storage provides document storage solutions in the areas of Fredericksburg, Virginia, while Document Systems Inc. serves the Central and coastal South Carolina. Philadelphia-based First National Safe Deposit provides offsite data protection services.

Although it is expected that these acquisitions will somewhat expand Iron Mountain’s domestic business and customer base, we believe that they will not contribute significantly going forward owing to the small scale and reach of these businesses.

As storage forms the crux of Iron Mountain’s business model (contributing 57.0% in the recently concluded first quarter of 2012), we believe that the company will continue to pursue accretive acquisitions in this sector (both domestically and internationally) over the long term. Recently, IRM acquired Grupo Store, an information management business, based in Sao Paolo, Brazil for $80.0 million in cash.

We expect Iron Mountain to drive significant growth through acquisitions in the emerging countries like Brazil, Russia, China and India, which will boost its international revenue going forward. We believe that this diversification and expansion will help the company counter sluggish growth in the domestic and European markets over the long term.

We believe that Iron Mountain will benefit from its ongoing strategic overhauling policy, announced in April last year. As per its comprehensive strategic plan, Iron Mountain has taken a number of initiatives to improve its profitability over the past year. These include not only accretive acquisitions along the same business line and adjacent market segments, but also a review of underperforming assets and business units and the gradual divestiture of these units.

In adherence to the policy, the company has dispensed with key assets of its under performing digital division and some other assets over the last 12 months. We believe that the emphasis on core business will help the company to enhance shareholder wealth over the long term.

The divestiture of underperforming units and assets will also enhance the company’s liquidity, which in turn will boost share buybacks and dividend activity going forward. Iron Mountain expects to return approximately $2.2 billion to shareholders through share repurchases and dividends by 2013.

We believe that Iron Mountain will continue to pursue growth opportunities in both domestic and international markets, which will help the company to achieve long-term targets of after-tax ROIC of 11.0% by 2013 (up from 7.7% in 2010), adjusted OIBDA margin of 32.0%, while lowering its capital spending to approximately 6.0% of revenue at the same time.

However, tepid internal growth coupled with volatile foreign exchange rates and a decline in paper prices are expected to partially negate the company’s strong product portfolio, increasing market share and promising international business. The company also faces stiff competition from Anacomp Inc. and Cintas Corporation (CTAS - Free Report) .

Thus, we have a Neutral recommendation on the stock. Currently, Iron Mountain has a Zacks #3 Rank, which implies a Hold rating in the near term.

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