Category: storage

A Mimosa-colored Iron Mountain

Brenon Daly

Contact: Brenon Daly

Adding a major piece to its information management portfolio, Iron Mountain said Monday that it will hand over $112m in cash for Mimosa Systems. (We noted two weeks ago that the market was buzzing on this possible pairing.) The purchase is the largest by Iron Mountain since its October 2007 acquisition of Stratify, a deal that serves as the basis for the company’s Iron Mountain Digital. (Stratify’s founder now heads up Iron Mountain’s digital business. Incidentally, Mimosa chief executive T.M. Ravi will join Iron Mountain Digital as head of marketing.)

The purchase of Mimosa adds on-premises content archiving to Iron Mountain Digital, and brings it more directly into competition with some of the largest suppliers of information management technology, including two companies that bought their way into the market. In mid-2007, Autonomy Corp paid a whopping $375m for Zantaz, and two years ago Dell shelled out $155m for MessageOne. We understand that Dell valued its archiving startup at slightly more than 6x trailing sales, while Autonomy paid about 3.3x trailing sales for Zantaz. According to two sources, Iron Mountain is paying roughly the same multiple that Autonomy paid, valuing Mimosa at about 3.2x its estimated trailing sales of about $32m.

NetApp: Single and lovin’ it

Brenon Daly

Contact: Brenon Daly

Jilted earlier this summer, NetApp is nonetheless doing just fine on its own, thank you very much. Shares of the storage giant are now changing hands at their highest level in more than two years, giving the company a market capitalization of a cool $10bn. (The stock tacked on 4% on Thursday after NetApp topped Wall Street expectations for its fiscal second-quarter results and indicated that its current quarter is shaping up stronger than investors initially projected. Shares closed up $1.21 at $30.83 Thursday in an otherwise down day for the market.)

Thursday’s move higher continues a recent bull run for NetApp shares since the firm got elbowed aside by EMC in the fight over Data Domain. In the six months since NetApp unveiled its unsuccessful bid for the data de-duplication specialist, shares of NetApp have soared 70%. (In comparison, the winner in the bidding war, EMC, has returned ‘only’ 40% over that period.) We mention the relative performance of the shares of the two vendors because originally, NetApp planned to use its equity to cover slightly more than half the cost of Data Domain. (With its deeper pockets, EMC always planned to pay all cash for Data Domain, as it did when it wrapped up the acquisition in late July.)

So, from the outset, we agree that our back-of-the-envelope calculation is a bit academic, given that the Data Domain deal has been done and dusted for nearly four months. (And we’ll acknowledge that it’s a bit inexact because NetApp never formally announced the precise amount of stock, or even the specific conversion price, that it planned to use.) Nonetheless, it’s pretty clear that Data Domain owners would have done pretty well if they had taken NetApp equity. (Of course, shareholders did just fine with the $33.50 in cash from EMC, which, at 7.4 times trailing sales, was the highest multiple paid for a US-listed public company since March 2008.)

With all of those disclaimers, here’s our math: When NetApp first announced the bid on May 20, its shares traded at about $17.30 each. Although it didn’t reveal the exact breakdown of cash and stock in its offer, which had an equity value of $1.75bn, we understand that NetApp was planning to hand over about $800m in cash and cover the remaining $950m in equity. Assuming that’s roughly the breakdown, that same chunk of NetApp stock would now be worth about $1.8bn – more than the full value of its initial cash-and-stock offer. Add the $800m in cash into the mix, and the total consideration for Data Domain (based on NetApp’s current share price) hits $2.6bn. That’s roughly $300m more than EMC ended up paying for Data Domain.

Rumor mill churning on CommVault

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

To paraphrase Mark Twain, a rumor can travel halfway around the world while the truth is still putting on its shoes. At least that’s the case with M&A gossip right now. Rumors are flying, in many cases given wing by some of the unusual multibillion-dollar pairings that have popped up in recent weeks. Who would have thought, for instance, that Cisco would have gone shopping in Norway (of all places) to ink its largest deal in a year and a half? And who would have picked Dell as the buyer for Perot Systems? (Except for that guy who traded Perot options on inside information, that is.)

All uncertainty, of course, serves as fertile ground for speculation and rumors. Earlier this week, The Wall Street Journal reported that Brocade Communications may have selected a banker to help it with a sale. While we’ve noted in the past that Brocade is likely to get snapped up, we have our doubts that anything is imminent. (And we doubt even more that Brocade would ever end up at Oracle, as the WSJ speculated.) But since we love rumors as much as the next person, we figured we’d pass along one that we’ve heard making the rounds this week: CommVault may be in play, with NetApp as the possible buyer.

We’ve mulled over a CommVault-NetApp pairing in the past, most recently after the storage giant lost the bidding war for data de-duplication specialist Data Domain this summer. But we’ve never felt that the two companies fit tightly together all that well. (Still, one recent competitive development may spur NetApp to make a move. Symantec, which had been a longtime partner of NetApp, rolled out its own NAS software offering. To counter Symantec’s move on its turf, NetApp could use the archiving and de-dupe offering that would come with CommVault. Whether that’s enough to drive a deal, well, we’re not so sure.)

There are still a lot of differences between the two companies. For starters, CommVault pretty much sells straight software, while NetApp wraps its IP in hardware. (Further, its boxes are at least partly an alternative to CommVault’s offering.) Also, CommVault, while now targeting enterprise sales, primarily pursues the low end of the market while NetApp sells at the high end. Add to that a newly appointed chief executive who might want to actually move into the corner office before making an acquisition that would (for good or ill) reshape the company irrecoverably, and we just don’t see NetApp reaching for CommVault.

Instead, we have our own leading candidate for CommVault: Dell. On the heels of its purchase of Perot, Dell went out of its way to say that it was still very much planning to do deals, and storage has been a focus of its shopping in the past. CommVault and Dell already have an OEM arrangement and share thousands of customers. The fact that CommVault recently rolled out a relatively low-cost de-dupe offering would make it even more attractive to Dell, we suspect. CommVault, which is solidly profitable, has a market capitalization of $870m but holds about $120m in cash, lowering its enterprise value to just $750m.

Solid-state storage market: OEM now, M&A later?

Brenon Daly

Contact: Brenon Daly

As buoyant as the Nasdaq has been so far this year, few stocks can come close to matching the stunning 10-fold rise of STEC Inc. After opening the year at about $4, shares in the maker of solid-state drives (SSDs) inched above $40 earlier this month. Perhaps inevitably, gravity (in the form of Wall Street concern over increased competition) has pulled STEC back down over the past week. Shares closed Wednesday at $30.85, leaving the company still with a cool $1.5bn market capitalization.

In a recent report, my colleague Henry Baltazar notes that STEC is the central player in the emerging SSD segment, one that could very well change the face of the multibillion-dollar server and storage markets. SSDs are much faster and far more efficient than traditional hard drives and disk-based storage arrays. Also, the prices of SSDs have come down sharply as they have moved from costly DRAM-based to flash-memory-based drives. Taken together, the pitch of ‘better, cheaper, faster’ has spurred phenomenal growth in the SSD space. For its part, STEC’s sales are projected to hit $350m in 2009, an increase of more than 50% in the midst of one of the softest IT spending environments in recent years.

This trend, of course, hasn’t gone unnoticed by the server and storage giants. So far, however, when these companies have run the ‘buy-build-partner’ calculus for the SSD sector, most have opted to partner. STEC, for instance, has OEM deals in place with nearly all of the major server and storage players, including IBM, Hewlett-Packard and a longstanding accord with EMC. As mentioned, though, competition is heating up as startups look to get established in this fast-growing market. New companies entering the space include Pliant Technology and SandForce (neither of which has announced any OEM agreements of its own so far), plus Fusion-io, which has OEM deals with HP and IBM, as well as reseller agreements with Dell and other vendors. If the SSD market continues to take off, we could certainly imagine one or more of these startups getting snapped up.

Unexpected partners in e-discovery dance

Brenon Daly

Contact: Brenon Daly

After a flurry of more than a half-dozen e-discovery acquisitions from mid-2007 to mid-2008, deal flow has dried up in the sector. Buyers during the active period included companies that, broadly speaking, have an interest in storing, managing and searching electronic information, including such tech giants as Seagate Technology, Iron Mountain and Autonomy Corp. Collectively, spending on all the e-discovery deals in that one-year period topped $800m.

And then, like the rest of the M&A market, e-discovery activity dropped off dramatically. In this vacuum, rumors started bouncing around. The main one, which we noted last October, had Symantec looking closely at Kazeon. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. (We also did a broader matchmaking report on the sector right around that time.)

And while a pairing between Kazeon and Symantec may well have made sense, the e-discovery vendor ended up selling to EMC on Tuesday. (Terms were not disclosed, but one report put the price at $75m. We think that may well turn out to be a bit higher than the amount EMC actually paid, particularly since we understand that Kazeon was only running at about $10m in sales.) So we were a bit off on our pairing for Kazeon, just as we were off on our assumption that EMC would reach for its longtime e-discovery partner, StoredIQ. Undeterred by that, we find ourselves nonetheless wondering if StoredIQ will end up at Symantec. There’s certainly some logic to that pairing. But then again, that was also true for the other deals we came up with that never got signed.

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.

A happy anniversary for Brocade-Foundry

Brenon Daly

Contact: Brenon Daly

As far as Wall Street is concerned, nothing has really happened to Brocade Communications over the past year. Shares in the storage and networking vendor trade exactly where they did this time last July. And yet, there have been monumental changes at the company during that time. Exactly a year ago today, Brocade announced its largest and riskiest deal: the $3bn purchase of Foundry Networks. The transaction faced a number of challenges, both in terms of strategy and execution. And compounding those difficulties was the fact that Brocade would be closing the acquisition during the most severe economic slowdown since the Great Depression.

For starters, Brocade was planning to borrow some $1.4bn of the $3bn purchase price. In normal times, that wouldn’t be a problem for a cash-producer like Brocade. But with the credit markets frozen last fall and people wondering about the economic outlook, borrowing seemed unlikely. (The uncertainty around the economy led the two sides to trim the final purchase price to just $2.6bn in late October; the transaction closed in mid-December.) Beyond the question of financing the pickup, folks questioned the wisdom of a deal that would move the combined company even more directly into competition with Cisco Systems, the most successful networking vendor of the modern era.

That thought certainly spooked investors. As soon as the pairing was announced, Wall Street knocked some 20% off Brocade shares and continued to put pressure on them well into this year. At their lows in early March, Brocade shares had lost some three-quarters of their value since the announcement of the acquisition. (That compares to a 40% decline in the Nasdaq during the same period.) The slide left Brocade in the absurd situation of sporting a market capitalization of just over $800m, despite tracking to generate about $1.9bn in sales in the current fiscal year. It was also a rather damning assessment of the Foundry buy, given that Wall Street was valuing the combined Brocade-Foundry entity at just one-third the amount that Brocade had valued Foundry.

It turns out that the market dramatically undervalued Brocade. Since bottoming out, its shares have quadrupled, giving the vendor a current market capitalization of $3.4bn. That run has left Brocade shares flat over the past year, while the Nasdaq is down some 18% during that time. Brocade has also slightly outperformed rival Cisco over the past year.

Wall Street seems to be digesting the fact that Brocade may actually be able to survive – even thrive – in its fight with Cisco. (For its part, Cisco hasn’t been helping its own cause. Recent actions, including introducing a new server offering, have created more enemies than friends.) Meanwhile, Brocade has integrated Foundry a quarter or two earlier than planned and has been pitching itself as a viable alternative to the giant. Despite a tough beginning, that message is starting to resonate with customers.

Broadcom-Emulex: Failure rewarded?

Brenon Daly

Contact: Brenon Daly

Is this a case of the market rewarding failure? Since Broadcom unveiled its now-aborted bid for Emulex, shares of both companies have outperformed the Nasdaq. That bull run stands in sharp contrast to the performance of firms that have been involved in other unsolicited efforts, as we noted when Broadcom first started squeezing Emulex. Broadcom took its unsolicited offer public for its fellow southern California-based vendor on April 21. Initially, Broadcom was set to hand over $9.25 in cash for each share of Emulex, although last week it bumped the bid up to $11 per share. That’s not a bad premium for Emulex, which had spent much of the year trading at around $6.

Of course, it’s not surprising that Emulex shares would be trading higher, given the ‘floor’ valuation that Broadcom put on the company. (On Friday morning, Emulex stock was changing hands at around $9, just slightly below Broadcom’s opening bid.) On the other side, Broadcom stock has slightly outperformed the broader market over the two and a half months that it has been trying to land Emulex. On Thursday, Broadcom gave up its effort. In a brief release explaining the abandoned bid, Broadcom CEO Scott McGregor said the company would now look at other ‘value-creating alternatives.’ Like, say, an unsolicited run at another company?

Is Riverbed the next Data Domain?

Brenon Daly

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.