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With signs pointing to a Dell spending spree, where does storage rank on its wish list?
Analyst: Henry Baltazar
Date: 22 Jun 2009
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Dell (Nasdaq: DELL) recently sold $1bn in bonds for 'general corporate purposes' to go along with the more than $9bn that it already has in its cash reserves. The vendor also recently hired 27-year IBM (NYSE: IBM) veteran David Johnson to lead its M&A efforts, which is a move that Big Blue is attempting to block with a lawsuit centered on Johnson's non-compete clause. Like most other IT vendors, Dell has had a rough year so far, with revenue in the first quarter of fiscal year 2010 (ending May 1) dropping 33% from $16.08bn a year ago to $12.34bn; its net income declined 63% from $784m to $290m.
Big buys have never been a forte for Dell, its largest deal being the $1.4bn acquisition of iSCSI storage systems vendor EqualLogic in November 2007. As far as M&A goes, Dell has completed just 12 transactions since 2002; in contrast, IBM closed 14 deals in 2008 alone – with Johnson in the VP of corporate development role. Should Dell and Johnson manage to get past the legal hurdles set up by IBM, there is no doubt that the vendor will look to M&A to grow its business. Despite the large amount of cash that Dell used to buy EqualLogic, storage remains a very small segment of its business, contributing just $534m in revenue (4% of its total) in Q1 FY2010.
With existing partners such as Cisco (Nasdaq: CSCO) and Oracle (Nasdaq: ORCL) – which is in the process of acquiring Sun Microsystems (Nasdaq: JAVA) – now priming themselves to become players in the server hardware market, Dell clearly needs to build up its portfolio to do battle with these new entrants along with its traditional rivals Hewlett-Packard (NYSE: HPQ) and IBM. One clear way to do this would be to expand its storage software and hardware lineups since these offerings are complementary to its core server and PC business. Dell's alliance with EMC (NYSE: EMC) – initiated in 2001 and recently renewed through 2013 – has been lucrative for both parties to date and has led to more than 60,000 joint deployments, which could lessen Dell's desire to add new storage technologies. Taking into account the fact that EqualLogic overlaps with EMC's core midrange storage offerings, it's clear that Dell is not afraid to ruffle some feathers, especially if an acquisition has the potential to add significant revenue to the company or provide it with a strategic advantage moving forward. As far as target markets go, a pickup in the de-duplication, services and solid-state-disk (SSD) arenas seems most likely for the vendor, though it could also acquire a player in the emerging cloud storage space.
Although Dell does not break out the total amount of revenue that its EqualLogic systems generated in Q1 FY2010, the company pointed out that revenue was up 71% for these iSCSI storage systems compared to the same period a year ago. Keeping that in mind, it would appear to be unlikely that Dell would make another move in the midrange storage space, especially given the $1.4bn that it already spent on EqualLogic. Looking at the high end of its enterprise storage lineup, Dell continues to leverage its partnership with EMC to fill this gap. Should Dell decide that ownership of this technology is crucial for its future growth, 3PAR (NYSE: PAR) would appear to be the most likely target. In 3PAR, Dell would obtain a storage vendor that has had solid traction in the service provider and Web 2.0 market and has a growing direct sales team, which has pushed the company to profitability.
Dell could acquire NetApp (Nasdaq: NTAP), which currently has a market cap of more than $6.5bn, but many of its systems overlap with EqualLogic and existing offerings. NetApp's systems would lessen Dell's dependence on EMC systems in the fast-growing NAS and data-backup markets, though it is unlikely that Dell would do a deal of this magnitude in the storage space.
In the cluster NAS sector, Dell could buy a smaller player such as Panasas, DataDirect Networks (DDN), Exanet, Ibrix or Isilon Systems (Nasdaq: ISLN) to add to its scale-out storage story. On the downside, these vendors tend to sell to niche markets such as HPC, media and entertainment and Web 2.0, which are typically 'high touch' environments and currently do not have much traction in the general enterprise storage space. Of these potential targets, DDN and Ibrix are already being resold by Dell though we would give the edge to DDN since its recently announced Web object scalar systems would give Dell an enabling technology in the emerging cloud storage space.
Turning to the de-duplication and data-protection market, in November 2008 Dell announced that it would deliver a single de-dupe architecture (developed by Dell, EMC and Quantum Corp (NYSE: QTM)) that would reach across the company's PowerVault, EqualLogic PS Series and Dell/EMC product lines. With NetApp and EMC's bidding war over Data Domain (Nasdaq: DDUP) drastically reshaping the de-dupe market landscape, and also calling into question the merits of Quantum's data de-dupe technology, Dell may now be inclined to make a play for one of the remaining de-dupe players. Should NetApp wind up as the buyer of Data Domain, Dell would probably be more pressed to make a deal since EMC would be able to grant Dell access to Data Domain's products through the expansion of its current OEM partnership.
Backup and archive software specialist CommVault (Nasdaq: CVLT), which added de-dupe capabilities earlier this year, would appear to be another potential target for Dell, given that the pair have been partners for a few years and have a shared customer base numbering in the thousands. In October 2008, Dell launched its DL2000 backup appliances, which come available in CommVault and Symantec (Nasdaq: SYMC) Backup Exec flavors, and earlier this month Dell announced that it would be making CommVault's data de-dupe technology available to DL2000 customers, which should give it insight into how well CommVault's offerings work at customer sites. Other potential targets with de-dupe capabilities include remote office backup specialist Asigra, which has an OEM partnership with HP, and backup and archive specialist Atempo.
Should Dell decide to implement target-based de-duplication, it could acquire a small SME-oriented player such as Exagrid Systems or a large enterprise-oriented vendor such as virtual tape library specialist Sepaton, which currently has an OEM partnership with Dell's archrival HP, or FalconStor Software (Nasdaq: FALC), which holds technology in a number of key areas such as replication, storage virtualization and continuous data protection.
Services is another market where Dell may look to make a move, especially since HP has become a major player through its $13.9bn acquisition of EDS (NYSE: EDS), which closed in August 2008. To keep pace with its rivals, Dell could buy a services organization to become a more strategic supplier of servers and storage for enterprise customers. Dell made an investment in IT infrastructure specialist GlassHouse Technologies in 2008, and is currently GlassHouse's largest partner in terms of revenue (though this is still less than 10% of GlassHouse's sales). In 2008, GlassHouse's revenue rose toward $100m and the service provider claims it has been profitable since Q3 2008, which should appeal to Dell.
Dell's $155m purchase of MessageOne in April 2008 added email-archive and continuity services to its lineup, and the vendor could broaden its footprint in the cloud storage services market through the acquisition of a startup such as Zetta or Nirvanix. In the consumer-oriented cloud storage market, Dell could also make a play for Box.Net, whose storage service is currently bundled with its Mini 9 netbooks. Dell has been active in the consumer online backup space through its DataSafe offering, which has been available since 2007 and appears to be a rebranded version of SwapDrive, which was acquired by Symantec for $123m in June 2008. Should Dell decide to buy its own backup service in this space, it could make a play for a startup such as Carbonite.
Dell has identified SSD as a key technology for both its server and storage product lines. The vendor has made an investment in SSD specialist Fusion-io, though it currently has not signed an OEM partnership with it. In March, Dell announced that its new EqualLogic PS6000 update would offer SSD drives from Samsung (KSC: 006400.KS) as an add-on option, and it currently ships EMC Clariion storage systems, which can be run with STEC Inc (Nasdaq: STEC) SSDs. Should Dell decide that owning SSD technology would provide it with a competitive advantage, Fusion-io would be a likely target along with STEC and Texas Memory Systems. Given that SSD is still a nascent market, an acquisition in this space does not appear to be likely at this time.
Dell's primary rivals in the server and storage sector continue to be IBM and HP, which both have extensive product lines. Because these players already have strong service organizations, it seems likely that Dell will be forced to eventually make an acquisition to boost its revenue and margins. The bundling of server and storage hardware tends to give HP, Dell and IBM an advantage over storage specialists such as EMC, Hitachi Data Systems and NetApp when selling to smaller companies, though competition intensifies further up the market. Dell's EqualLogic iSCSI storage systems also vie with offerings from a number of strong players, including Compellent (NYSE: CML), Xiotech and Dynamic Network Factory/StoneFly.
In the de-dupe space, Data Domain continues to be a market leader and its acquisition – either by NetApp or EMC – should give whoever wins the bidding war an advantage in this sector. Through the purchase of CommVault, Dell could gain access to this technology, though this move would effectively turn valuable partners such as Symantec into rivals.
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Company: Dell
Other Companies: 3PAR, Asigra, Atempo, Box.net, Carbonite Inc, Cisco Systems, CommVault, Compellent Technologies, Data Domain, DataDirect Networks, Dynamic Network Factory, Electronic Data Systems, EMC Corp, EqualLogic, ExaGrid Systems, Exanet, FalconStor Software, Fusion-io, GlassHouse Technologies, Hitachi Data Systems (HDS), Hewlett-Packard, IBM, IBRIX, Isilon Systems, MessageOne, NetApp, Nirvanix, Oracle, Panasas, Quantum Corp, Samsung, Sepaton, STEC Inc, StoneFly Inc, Sun Microsystems, SwapDrive, Symantec Corporation, Texas Memory Systems, Xiotech, Zetta
Analyst: Henry Baltazar
Sector:
Storage / Disk systems
Storage / Components
Storage / Data Protection / Data de-duplication
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