Category: storage

A floppy market for disk storage M&A

Stephanie Turner

by Scott Denne

As we noted in 451 Research‘s Tech M&A Outlook 2020, the emergence of a new set of buyers propped up the tech M&A market last year, and that’s continued to be the case this year. The trend is particularly pronounced in the storage market, where the traditional acquirers have hit the brakes on M&A as storage shifts to the cloud.

NVIDIA became the latest company to join the ranks of newly minted storage acquirers with its purchase of SwiftStack. As detailed in our report on that transaction, NVIDIA likely doesn’t have its eye on the enterprise storage market. Instead, it’s buying technology to enable its GPUs to perform machine-learning tasks without bottlenecks. Similarly, Amazon and StorCentric have also emerged as new buyers of storage targets in the last 18 months – both acquired startups that were founded to spark a second wave of flash storage systems, a movement that hasn’t really taken off (a development we analyzed here).

Meanwhile, the most active storage acquirers have halted deal making. EMC, for example, hasn’t printed a new storage acquisition since its 2015 sale to Dell – and Dell itself, once a frequent buyer of storage tech, hasn’t done a deal in the space since the EMC acquisition. Western Digital bought Kazan Networks in a $22m deal this fall. But prior to that, none of the previous decade’s 10 most frequent storage acquirers had nabbed a company in the space since 2017. And that’s weighed on exits. According to 451 Research‘s M&A KnowledgeBase, 2018 and 2019 saw, respectively, the fewest and second fewest acquisitions of storage companies of any year since 2002. And this year is pacing to finish below the 20 deals we recorded in 2018.

The drooping totals come as companies move more data into cloud services and away from investing in the kind of large-scale storage systems that the most prolific acquirers in this market have offered. According to 451 Research‘s Voice of the Enterprise: Digital Pulse, 27% of respondents said their organization will decrease its budget for storage infrastructure, nearly double the number (16%) that anticipate rising storage budgets in 2020. As customers decrease spending on storage systems, acquirers for companies selling storage could become harder to find, just as the urgency to exit grows.

Figure 1: Anticipated decline in server, storage and datacenter spending
Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets and Outlook

Exclusive: A deal for Datto?

Brenon Daly

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Western Digital takes a familiar path into new markets with a pair of deals 

Scott Denne

Contact: Scott Denne, Tim Stammers

Western Digital has printed two different deals that follow the same pattern. The disk-drive giant has acquired enterprise storage vendor Tegile Systems along with Upthere, a developer of consumer cloud storage products, continuing its recent feast-then-famine M&A pace. Those targets mark the first companies it has bought since reaching for SanDisk in a $17bn transaction at the end of 2015.

In Western Digital’s last cycle, it spent $1bn across three acquisitions in the solid-state storage sector in the third quarter of 2013, followed by a 15-month hiatus from the market. Before that string of SSD deals, but after its $4.3bn purchase of HGST in 2011, it had only bought one company – a tuck-in of backup software firm Arkeia.

Like each of the last four private companies that Western Digital purchased, both of today’s targets took minority investments from Western Digital, which led the most recent venture rounds raised by Tegile and Upthere. Both transactions also push Western Digital further upmarket. Upthere sells high-performance cloud storage services designed for pictures, extending Western Digital’s consumer storage business and, since Upthere builds its own infrastructure rather than running on AWS, it brings a technical team that could bolster the acquirer’s ability to deliver enterprise offerings for other cloud services.

With Tegile, Western Digital becomes a full systems provider – a shift that’s been many years and many deals in the making. Purchases of Virident and SanDisk brought it hardware products to sell directly to enterprises, rather than OEMs, and acquisitions of Skyera and Amplidata brought it software IP that could potentially be used to build its own storage systems. If the past is any indication, Western Digital is wise to stick to its patterns – the company’s stock is up 90% in the wake of its SanDisk buy and a year-long streak of beating Wall Street’s projections.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Cisco’s storage M&A reboot

Scott Denne

Contact: Henry Baltazar, Liam Rogers, Scott Denne

Following an impulsive and failed marriage, Cisco has opted for a long courtship for its second commitment in the storage market. The networking giant has paid $320m for Springpath, a maker of hyperconverged infrastructure (HCI) software and a longtime Cisco partner.

Cisco led Springpath’s $34m series C round in 2015 and the next year launched its HCI appliance, HyperFlex, built with Springpath’s software. A patent infringement lawsuit brought by rival SimpliVity may have delayed the consummation of this deal, as its final status is still unclear. As we wrote in an earlier report, HyperFlex sold well and demonstrated an ability to bring new customers to Cisco. In a 451 Research Voice of the Enterprise survey, 18.3% of IT professionals were using Cisco HyperFlex, behind only converged offerings from VMware and Dell-EMC.

By contrast, its last foray into storage was the $415m purchase of all-flash array vendor WHIPTAIL, which offered a product that was meant to compete with several of Cisco’s then partners and had only gained traction with about one-quarter as many enterprises as Springpath has reached on Cisco’s servers, where it is exclusively sold.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

NetApp taps Greenqloud for hybrid storage push

Scott Denne

Contact: Scott Denne

NetApp’s reach for Greenqloud marks its third deal of 2017 as the storage vendor climbs its way out of a rocky couple of years. With the purchase of the cloud management provider, NetApp turns 2017 into a busy – although thrifty – year for M&A.

According to 451 Research’s M&A KnowledgeBase, NetApp has never before bought more than two companies in a single year. The price it’s paying for Greenqloud hasn’t been disclosed, but the target has a modest headcount and raised little funding. In its other two transactions this year – Immersive Partner Solutions and Plexistor – NetApp shelled out less than $30m in cash (total). None of the three warranted a press release – instead they were announced via quarterly earnings calls.

After five years of revenue declines, NetApp’s sales are beginning to level off. In its last quarter (the first of its fiscal year), revenue rose 2% to $1.3bn and its profit increased by 2x. Part of its strategy for getting back to growth and improving margins has been a focus on flash storage with its last major acquisition, SolidFire ($870m).

Another part of the company’s strategy, unusual among storage OEMs, is its expansion of hybrid cloud storage capabilities. NetApp’s desire to push its cloud connections forward drove both today’s deal and its pickup in May of Immersive Partner Solutions, which makes hybrid cloud monitoring software. Greenqloud brings NetApp a team that’s been offering public cloud management since 2010, and its Qstack product gives NetApp the technology architecture to expand its delivery of cloud services.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

PE-backed StorageCraft crafts another deal

Brenon Daly

Contact: Steven Hill Brenon Daly

In the year since TA Associates picked up StorageCraft Technology, the data-protection vendor has been working to build out a broader vision for metadata-rich data protection and management. Its latest move adds scale-out NAS appliance vendor Exablox, already an existing partner. Terms weren’t disclosed. The purchase of Exablox is StorageCraft’s second acquisition since being bought by private equity firm TA Associates, and comes five months after it snagged data analytics startup Gillware Online Backup.

This deal further extends an existing partnership between Exablox’s object-based core technology and StorageCraft, which has focused its recent strategy on metadata-based, long-term data management and protection. Both companies stressed that Exablox appliances will continue to be marketed for both primary storage and secondary storage applications, as opposed to a dedicated backup appliance only. The pairing has potential benefits for both companies, in particular adding StorageCraft’s ShadowProtect data protection and Gillware-based data intelligence enhancements to the Exablox platform.

From our perspective, the transaction reflects an increasing awareness of the importance of metadata as part of a larger vision for long-term data protection and management across the industry. Data growth is a given, and these vendors recognize that the next generation of storage requires greater intelligence about the data itself. Buying Exablox should allow StorageCraft to add closely integrated, on-premises storage offerings as an extension of its existing cloud, SaaS, storage analytics, data-protection and DR/BC portfolio. With the scarcity of funding available for storage and infrastructure companies, we expect more vendors to use deals such as StorageCraft’s reach for Exablox to expand their technology and market opportunity.

Dell-EMC closes, but there’s still dealing to be done

Brenon Daly

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

NetApp nabs SolidFire before all-flash array opportunities burn away

Scott Denne

Contact: Scott Denne Tim Stammers

Making its most aggressive deal to date, NetApp pays $870m in cash for all-flash storage array (AFA) vendor SolidFire. NetApp’s major competitors long ago inked acquisitions to get into the AFA market, while NetApp took the unusual step of trying to develop a product internally – a project that saw only temporary and limited release of a device that was lacking several critical features.

The price tag shows that NetApp feels some urgency to fix that gap. We estimate that the market for AFAs will grow at a 36% CAGR between 2014 and 2019. NetApp typically prints about one transaction per year and has often bought sub-$10m revenue companies for high multiples. On an absolute basis, this is the biggest deal NetApp has done. In 2011, it spent $480m on LSI’s aging RAID storage business – a business that generated $700m in sales. SolidFire, by comparison, likely posted $50-100m in trailing revenue.

It appears that a bit of traction and patience has benefited SolidFire and its investors. Not only is this an unusually large acquisition for NetApp, the price tag is higher than any we’ve seen among AFA providers.

Past all-flash array M&A

Date announced Target Acquirer Deal value
December 21, 2015 SolidFire NetApp $870m
December 15, 2014 Skyera Western Digital Not disclosed
September 10, 2013 Whiptail Technologies Cisco Systems $415m
August 16, 2012 Texas Memory Systems IBM (see 451 estimate)
May 10, 2012 XtremIO EMC (see 451 estimate)

Source: 451 Research’s M&A KnowledgeBase

Look for a full report on this deal in tomorrow’s Market Insight Service.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA

Mimecast sets stage for IPO

Scott Denne

Contact: Scott Denne

Mimecast’s business is best described in the same language as the enterprise email systems it has grown up managing: reliable, but not very exciting. The 12-year-old provider of archiving, management and security of business email is prepping for an IPO, and the prospectus published in pursuit of that shows a company that, at least for the last few years, has put up steady numbers.

For its most recent fiscal year (ended March 31, 2015), Mimecast posted $116m in revenue, up 31% from the year before and just one percentage point higher than its growth during the previous period. Gross margins in 2014 came in at 68% – the same level as the previous two years – and operating expenses as a percentage of overall revenue have ticked down 10 percentage points in each of the last two years, helping the company trend toward profitability.

What has fluctuated is foreign currency. Nearly two-thirds of Mimecast’s revenue comes from currencies other than the US dollar. In 2014 that brought it a $5m gain, pushing it slightly into the black. The previous year, currency changes led to a $5m expense, contributing to a $16m loss.

When it comes to the valuation the company might fetch, we look at Proofpoint as the best indicator of where Mimecast might trade. The quasi-competitor posts similar gross margins and a similar growth rate to Mimecast, and is valued at 10x trailing revenue. Even though Proofpoint has far steeper losses, its growth is coming off a revenue base that’s about twice Mimecast’s, and it has built up a fair amount of goodwill (and a 4x increase in its share price in the three-and-a-half years since its IPO) with investors through a series of positive revenue announcements and upward adjustments of revenue guidance. Given those factors, we would expect Mimecast to price below the 10x mark by a few turns, likely in the 5-7x trailing revenue range.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Brenon Daly

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15