Are customers buying the Dell-EMC deal?

Contact: Brenon Daly

Michael Dell has had his say. Same with Joe Tucci. But are the customers of the Dell and EMC chief executives actually buying what the two companies are saying about the tech industry’s largest acquisition? Only one way to find out: ask them.

With the ink barely dry on the announcement of Dell’s record-breaking $63.1bn purchase of EMC, 451 Research’s Voice of the Enterprise surveyed almost 450 IT decision-makers to get their sense of what they liked about the transaction, what worried them and, most importantly, how the proposed combination would affect their IT spending. (See the executive summary of the survey results.)

Ultimately, the sentiment and intention voiced by customers – such as those we surveyed – will determine whether Dell-EMC builds itself into a true IT infrastructure and services powerhouse or, like so many other multibillion-dollar tech pairings, devolves into an unhappy, underperforming union. So what does the ‘buyside’ think about the deal?

  • Overall, three out of 10 respondents gave the mega-transaction a thumbs-up, compared with two out of 10 who voted it down. However, within that broad assessment, there was a clear division between the Dell and EMC camps. Dell-only customers (those that currently buy no products from EMC but do buy from Dell) were almost three times more likely to have a favorable view of the deal than EMC-only customers (40% vs. 15%).
  • Why are a plurality of EMC customers bearish about the company’s prospects inside Dell? For the most part, they still view Dell as dealing in commodity technology. More than four out of 10 EMC-only customers consider Dell primarily a PC supplier, and another 20% identify it as mainly a low-cost IT supplier.

As we look at the results of the survey, particularly the perception of Dell as a ‘box maker,’ we can’t help but think that some of the sharp divergence between the views of the two customer bases is attributable to the sharp divergence between the M&A programs at the two companies. To be blunt, Dell was late to the game, with a long-held institutional preference for organic development rather than inorganic expansion. In contrast, EMC liked to shop, spending more than $20bn on 100+ acquisitions over the past 15 years, according to 451 Research’s M&A KnowledgeBase.

In fact, by the time Dell (belatedly) got its M&A machine revving in mid-2007, EMC had already purchased many of the key components of its ‘federation’ business: Documentum, RSA and, of course, the crown jewel of VMware. One existential question – which, for the record, we didn’t ask our panel of IT buyers – was whether Dell would have even needed to buy EMC outright if it had picked up some of the other companies that were nabbed by EMC. Again, to see the responses to questions we did ask on the Dell-EMC combination, check out the executive summary.

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IBM’s object lesson

Contact: Scott Denne

IBM snags object storage specialist Cleversafe for a foothold in an increasingly important niche in enterprise storage. Despite its age and size – founded in 2004 and with 210 employees – the target was still a relatively early company. As we recently noted, Cleversafe had taken the long view of the object storage opportunity – that it would take 100 engineers at least five years and more than $100m in funding, which it raised, to have a viable product. In that time, the vendor rewrote its core stack twice and deployments were just starting to take off.

Object storage itself isn’t new, but the opportunity is gaining traction with the growth of cloud computing. As more businesses and people look to store large, infrequently accessed files such as videos, pictures and backups, object storage provides a better alternative to SAN and NAS systems and is becoming a key component of cloud storage services. And it’s worth noting that it’s IBM’s cloud group, not its storage unit, that is leading today’s deal.

Prior to this transaction, IBM seemed on the fence about the opportunities in object storage. Now that it’s taken out one of the pioneers of next-generation object storage, it will set off speculation that others will follow suit. Last year Red Hat shelled out $175m for Inktank and earlier this year Hitachi Data Systems paid $264m for Amplidata. And there are still plenty of potential targets left, including Cloudian, DataDirect Networks, SwiftStack and Scality, which recently partnered with Dell.

We’ll have a more detailed report on this acquisition in a forthcoming 451 Market Insight.

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Barracuda bite off bigger chunk of MSP market with Intronis

Contact: Dave Simpson Brenon Daly

In its largest acquisition to date, Barracuda Networks nabs Boston-based Intronis for $65m in cash, primarily to improve its position in the MSP space. Intronis, a hybrid cloud backup/recovery vendor with 100 employees, is not well-known as about 75% of its MSP customers white-label its services. But it has almost 2,000 MSP partners, compared with only 200 MSP partners (and 5,000 VARS) for Barracuda alone.

Barracuda has averaged about a deal per year over the past decade, most recently focusing its M&A on its storage business. However, the company has noted some recent weakness in the overall storage space, which is a smaller portion of Barracuda’s overall sales than its security business. Although Barracuda was already in the upper echelon of hybrid-cloud backup/recovery vendors, the Intronis buy should strengthen its position versus key competitors in the storage arena. Also, there is little overlap between the two vendors’ channel partners. Only 37 of Intronis’ top 200 partners are also Barracuda partners, and 90% of Intronis’ partners are not Barracuda partners.

We have for some time been predicting – even advocating – consolidation in the crowded market for online (cloud-based) backup and recovery. Barracuda’s purchase of Intronis is the first shoe to drop, and we anticipate further consolidation in this sector over the next year.

The deal is expected to close by the end of this calendar year. Needham & Company advised Intronis on its sale. Click here for a full report on this transaction.

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Seagate pushes up the stack with Dot Hill

Contact: Simon Robinson Scott Denne

Seagate finally opened up its wallet a bit, paying $694m for storage-systems company Dot Hill Systems. With an enterprise value of $645m, Seagate values the target at 2.6x trailing revenue. While certainly not an industry record (and half a turn below the median for similarly sized storage deals), it’s a 79% premium on Dot Hill’s prior-day stock price. And the purchase marks a high for Seagate, which hasn’t broken the 1x TTM revenue mark on any hardware or systems vendor in at least a decade, according to 451’s M&A Knowledgebase.

The Dot Hill acquisition marks another notable step in Seagate’s transition from an HDD manufacturer into a broader supplier of data-storage products and services. Historically, HDD manufacturers have been reluctant to develop systems-level products, lest they tread too strongly on the toes of their major server and storage OEM customers. However, Seagate has been here before – in 2000 the company acquired storage systems specialist Xiotech for $360m. This was not a successful move, and Seagate later unloaded the company.

So why does Seagate think it can succeed this time around? A couple of things have changed the dynamic and emboldened the HDD suppliers. First, there are only two major HDD manufacturers remaining: Seagate and WD/HGST (with Toshiba a distant third). This effective duopoly means that the major storage/server OEMs have little choice when it comes to sourcing their HDDs (especially if they wish to dual-source). Second, and perhaps more significant, is the fact that large-scale and hyperscale datacenter operators (Internet/cloud giants, large service providers and even some large enterprises) are bypassing traditional storage systems approaches and direct-sourcing their HDDs from the manufacturers.

Perella Weinberg advised Seagate on the transaction, and Needham & Company and Morgan Stanley advised Dot Hill. We will have a detailed report on this transaction in tomorrow’s 451 Research Market Insight Service.

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Pure’s playbill

Contact: Scott Denne

It’s a play we’ve seen before: an enterprise company ingests massive amounts of venture capital to fund eye-popping top-line growth before debuting on Wall Street for Act Two. This version stars Pure Storage, a darling of the all-flash array market. Leave the kids at home for this one – Pure is posting an obscene amount of growth and when the curtain rises, it’ll be seeking an equally obscene valuation.

Pure’s now-public IPO prospectus shows that the company finished its most recent fiscal year with $174m in revenue, fully 4x its sales from the previous year. On a trailing basis, it generated $224m in revenue and the most recent quarter showed a more modest 3x year-over-year growth. As one would expect, there’s a massive investment in sales and marketing underlying that growth. That investment appears to be paying off as its sales and marketing spending – $153m last year –is ratcheting down to 87% of its revenue, from 128% last year and 177% the year before.

As expected, Pure still posts huge losses: $183m last year, up from $79m the year before. Its trajectory, however, points to eventual profitability. Overall, its costs are coming down – at least as a share of revenue – and the margins on its products are making meaningful gains. In the most recent quarter, Pure reached a 64% gross profit on its product sales, up from 59% last year and 49% the year before. To put that in perspective, NetApp, a storage provider that’s about 30-times larger (for now), generated a 54% product margin last year.

Pure’s last venture round, a $225m series F in April 2014, put a $3bn valuation on the company. No doubt it will be looking for a boost from that. To get a meaningful bump up, it will have to be valued at or above 15x trailing revenue. That’s a tough spot to hit, though not impossible. Recent high-flying hardware IPOs Arista Networks and Nimble Storage are both currently putting up about 7x off of comparably mild levels of growth (40-50%). For a better comp, you’d have to go back to the 2007 debut of Data Domain, whose growth was equally impressive, though slightly behind Pure’s, and whose IPO priced at 12x in a more sedated market for tech stocks.

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EMC’s core business no longer in sync with file sharing

Contact: Alan Pelz-Sharpe Scott Denne

Storage giant EMC has announced that it is selling its enterprise file-sync/share (EFFS) product division, Syncplicity, to private equity (PE) firm Skyview Capital for an undisclosed amount. It’s the first PE deal in the EFSS world, and follows BlackBerry’s acquisition of WatchDox and the Box IPO. No doubt more deals are to come in this rapidly maturing sector.

Following the close of the transaction (expected later this month), EMC will retain a minority interest in the business it has owned for the past three years. Syncplicity was originally acquired by EMC at a price that seemed a bit expensive (see our estimate of that deal here ). Yet in the three short years since, Syncplicity has thrived within EMC. We estimate that its revenue has grown substantially during that period – in no small part due to EMC’s sales team (see our estimate of Syncplicity’s revenue here).

EMC already has multiple EFSS products, and this division, though doing well, wasn’t core to its overall business. So divesting it and gaining good hard cash in the process was logical. It is, however, a tough pill to swallow for the Syncplicity team, who had been given free rein to operate as a startup and did exceptionally well to make it one of the top players in its sector. Even so, EFSS is a small business for EMC and parting ways makes perfect sense.

We’ll have a more detailed report on this transaction in tomorrow’s 451 Market Insight.

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Dropbox continues collaborative streak

Contact: Scott Denne Alan Pelz-Sharpe

Dropbox prints another collaboration deal, this time picking up CloudOn, a service for creating, editing and sharing Word, PDF and other documents over the Internet. The purchase comes just two months after a Faustian pact with Microsoft to completely integrate Office with Dropbox.

Today’s transaction appears to be larger than most Dropbox tuck-ins. The target raised $26m in venture funding and had about 50 employees. The deal (and the Microsoft partnership) highlight Dropbox’s efforts to build out collaboration and workflow tools to appeal to business customers, particularly SMBs. And with it, Dropbox continues a streak it began last year of nabbing collaboration tools and teams to add to its core sync and share offering.

A year or two ago, CloudOn would have been seen as a legitimate competitor to Dropbox. No longer. Now it’s time for consolidation as Dropbox and soon-to-be-public Box reach for the startups with the coolest features and functions.

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Citrix stays tactical

Contact: Scott Denne

Citrix’s first acquisition of 2015 sets it up for another year of tactical M&A. Though up from 2013, we tracked just $65m in dealmaking by Citrix in 2014. Sanbolic, a 15-year-old company that brings software-defined storage into Citrix’s VDI stack, appears to be another tuck-in.

In 2012, Citrix announced $833m in acquisitions. That was its highest annual total on record, though it was hardly an outlier. Over the previous decade Citrix had been willing to invest in larger deals. Prior to that record-breaking year it had only dipped below $100m annually on three occasions – 2009, 2008 and 2004.

Citrix was growing revenue at a double-digit pace in 2012. Now that its core desktop business is maturing, growth has come down to mid-single digits in the most recent quarter, with license revenue declining at the same rate. Last year, management was open about the fact that M&A would likely be limited to tuck-ins, rather than strategic deals such as Zenprise and Bytemobile that got Citrix into ancillary markets. If Sanbolic is any indication, the company doesn’t plan to change that just yet.

Citrix M&A by year

Year Deals Deal Value
2014 4 $65m
2013 2 $11m
2012 6 $833m
2011 7 $354m
2010 4 $127m
2009 0 $0
2008 3 $27m

Source: The 451 M&A KnowledgeBase

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WD reaches up the storage stack

Contact: Tim Stammers Scott Denne

Could Western Digital’s Skyera acquisition be its first step to becoming a full storage systems vendor? The purchase brings the disk drive giant a product to immediately move up the stack and become a systems provider. We don’t believe, however, that Skyera’s systems were the main motivation for the deal.

Skyera was building all-flash storage arrays, with much of the focus on building its own flash drives and controllers. That intellectual property and expertise will fit well inside WD’s existing lines of PCIe, SAS and SATA enterprise flash drives, as well as its embedded offerings. It could also provide some of the building blocks for WD’s HGST subsidiary to put together its own array.

Skyera’s systems have not seen huge success in the highly competitive all-flash array market, as they lack standard enterprise features such as multi-controller availability, as well as data management services. And the company appears to have had trouble attracting new capital to its most recent round, relying on existing investors (including WD) to fund it with an undisclosed amount of capital, on top of the roughly $70m that Skyera raised across two earlier rounds.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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NetApp carves SteelStore out of Riverbed

Contact: Brenon Daly

NetApp’s first acquisition in more than a year and a half comes with a bit of a twist. The storage giant is only a few months removed from a period in which hedge fund Elliott Management was stirring for changes at the company. Having largely settled with the activist investor, NetApp has now picked up a division carved out from Riverbed Technology, which is currently being targeted by Elliott.

Terms call for NetApp to pay $80m for Riverbed’s SteelStore cloud storage gateway. The size of the business, which was formerly known as Whitewater, wasn’t disclosed. However, our understanding is that it was generating less than $10m in sales. Only 26 employees are going over to NetApp as part of the deal.

SteelStore was part of Riverbed’s broader portfolio expansion, an effort that hasn’t really paid off for the company. Some 70% of Riverbed’s revenue still comes from its core WAN optimization unit. The slowdown in that business is one of the main drags on Riverbed, which recently forecasted that sales in the current quarter may be flat.

However, according to our understanding of the transaction, it wasn’t driven by Riverbed, which is currently exploring ‘strategic alternatives,’ looking to jettison a non-core business. Instead, we gather that NetApp went after the division. Neither side used a financial adviser.

That dynamic may help explain the relatively rich valuation of the deal. (Though we would note that both EMC and Microsoft also paid princely multiples in their purchases of cloud storage gateways.) Also, price-to-sales multiples tend to get exaggerated by companies posting only tiny revenue.

And to be clear, virtually all of the cloud storage gateway startups are generating tiny sales. In a recent study of IT professionals at midsized and large enterprises conducted by TheInfoPro, a service of 451 Research service, only 4% of participating companies had deployed cloud storage gateways – a figure that was essentially unchanged from a similar TIP study in 2013. (See our full report .) With the cloud storage market still very much in its early stages, we would argue that a gateway startup is more at home in a storage vendor like NetApp than in a networking provider like Riverbed.

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