Category: storage

Can tech companies wearing sensible shoes be nimble?

Brenon Daly

Contact: Brenon Daly

As the tech giants get more and more gray hair on their heads, they all seem to desperately want to be young again. How else to explain the impetuous plan by the sensible shoe-wearing Hewlett-Packard to separate its enterprise and consumer businesses, with the stated goal of making the two independent companies more ‘nimble?’ Do the architects of the plan somehow think that cutting in half a 75-year-old company will create two businesses in their late 30s?

Remember, too, that about three years ago, HP initially dismissed a similar (but smaller-scale) plan to spin off just its PC business. At the time, executives said HP was ‘better together,’ citing low supply costs, improved distribution and easier cross-selling from the broad HP portfolio.

So why the change of heart that will result in a messy disentanglement taking about a year to implement, costing billions of dollars and resulting in as many as 10,000 additional job cuts? We suspect the fact that HP sales are now 10% lower than when it dismissed that spinoff plan may have something to do with it. (As we noted earlier, HP is basically splitting itself into two companies roughly the size of Dell, which itself had a massive and contested change in corporate structure last year as it sought a ‘fresh start’ through a $24bn leveraged buyout (LBO).)

In addition to HP – Silicon Valley’s original startup – a number of other tech industry standard-bearers have found (or likely will find) themselves under pressure to radically overhaul their corporate structure in pursuit of growth. Some of these have already been targeted by activist hedge funds, while others are still on a watch-list:

  • CA Technologies: Revenue is declining at the 38-year-old company, but it still throws off a ton of cash, trading at less than 10 times EBITDA. Its size and financial profile make it a textbook LBO candidate.
  • EMC: Already under pressure by an activist shareholder to ‘de-federate’ its business, EMC has staunchly resisted calls for change with a variation on the ‘better together’ theme. (But then, so did eBay until recently.) With VMware, it owns one of the most valuable pieces of the IT vendor landscape.
  • Symantec: After a decade of trying to marry enterprise storage and security, a corporate divorce seems likely at some point. (The three CEOs the company has had in the past two years have all kicked around such a separation.) Meanwhile, the topline is flat and Symantec trades at a discount to the overall tech market at just 2.5 times sales.
  • Citrix Systems: In business for a quarter-century, Citrix rode the wave of client-server software to a multibillion-dollar market value. However, despite numerous acquisitions and focus, it has yet to fully capitalize on the next wave of software delivery, SaaS. That business currently generates about 25% of total revenue at Citrix but is only slightly outpacing overall growth, despite industry trends. Citrix stock has been flat for the past four years, while the Nasdaq has nearly doubled during that period.

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‘One HP’? Not any longer

Brenon Daly

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

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Hitachi’s late de-dupe deal

Scott Denne

Contact: Scott Denne Dave Simpson

Years later, Hitachi Data Systems follows the competition with a de-duplication acquisition of its own, buying longtime partner Sepaton. Prior to yesterday’s announcement, there hadn’t been a purchase of a de-dupe company in nearly four years.

Almost all of HDS’s hardware rivals – including EMC, IBM and HP – already have strong plays in the data-protection software space. For backup and recovery, HDS primarily relies on its reseller partnership with CommVault. We expect HDS to eventually integrate Sepaton’s technology with its HDIM software, which is the result of its purchase of data-protection vendor Cofio. In addition, we anticipate tight integration of Sepaton’s platforms with HDS’s primary storage systems and software.

Past de-dupe deals

Date announced Acquirer Target Deal value
August 14, 2014 Hitachi Data Systems Sepaton Not disclosed
December 20, 2011 Imation Nine Technology $2.5m
July 19, 2010 Dell Ocarina Networks Click for estimate
June 1, 2009 EMC Data Domain $2.35bn
April 18, 2008 IBM Diligent Technologies Click for estimate

Source: The 451 M&A KnowledgeBase

Subscriber’s to 451 Research’s Market Insight Service can click here for a detailed report on HDS’s acquisition of Sepaton.

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Microsoft nabs InMage for hybrid DR

Scott Denne

Contact: Dave Simpson Scott Denne

Microsoft’s pickup of InMage Systems strengthens its hand against VMware in the increasingly important area of disaster recovery. Unlike VMware, Microsoft now supports virtually all enterprise platforms for disaster recovery, whereas VMware is limited to its own environments.

While there are other emerging companies with a focus on disaster recovery for virtual machines, Microsoft was drawn to InMage for the depth and maturity of the technology the vendor has built up in 15 years of operations, and InMage’s focus on hybrid clouds plays into Microsoft’s ambitions in the service-provider market, where it has gained some recent traction.

Today, VMware is Microsoft’s main rival on the disaster-recovery front, and we expect that it will begin to see more of Amazon, which has been busy adding business-continuity features to the AWS cloud, including a recent partnership with HotLink, which provides DR services for VMware environments by using AWS as the recovery infrastructure.

Subscribers to 451 Research’s Market Insight Service can click here for a detailed report on this transaction, including a profile of InMage, a look at its competition, and an estimate of its trailing revenue.

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Dropbox syncs collaboration strategy

Scott Denne

Contact: Erin Zion Scott Denne

Dropbox nabs another collaboration startup as the file sync and sharing vendor expands its communications and collaboration products to shore up sales to businesses. The announcement that Dropbox has picked up Droptalk, which makes a messaging app focused on sharing files and Web content, marks its third collaboration acquisition in as many months.

This strategy stands in contrast to Dropbox’s competitors, most notably Box and Hightail, which have recently reached for security firms to make their offerings business-compatible. However, it’s worth noting that Dropbox’s business ambitions are mostly in the SMB space, and it doesn’t have much traction among enterprise customers, where the bar for security would be higher.

Though Dropbox is a marquee name in file sharing, the sector is commoditizing rapidly (as we pointed out here and here) and is crowded with dozens of startups and some of the biggest names in tech. Layering on collaboration capabilities can help Dropbox alter the terms of its competition and is certainly a more attractive option than vying on price alone – an option that would quickly become onerously expensive, even for a heavily funded company like Dropbox.

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Sync and share startups get Boxed in

Scott Denne

Contact: Scott Denne Alan Pelz-Sharpe

Dozens of enterprise file sync and share (EFSS) startups were looking toward the Box IPO to set a high bar for valuations in this crowded space. Instead, Box delayed going public and, by filing an S1, exposed the extensive costs involved in building out a viable EFSS business.

There have been few EFSS exits – a worrisome development for many startups as sync and file sharing are rapidly becoming a commodity. Unlike other commoditized tech sectors, there hasn’t been a single marquee exit from EFSS. Contrast that with markets like mobile device management, which has more than 60 vendors but already has a $1.5bn exit (AirWatch) and at least $600m in market cap coming (MobileIron), as well as several $100m-plus acquisitions.

Had Box gone public at the expected time and multibillion-dollar valuation, the IPO would have likely triggered a fast-tracking of M&A activity and maybe even a number of smaller offerings in its wake. Although Box itself will likely find its way to a strategic acquirer or an eventual IPO and billion-dollar exit, many of the 30-40 startups in this space will face pressure to stem losses and find profits or potential buyers.

We’ll have a report in tomorrow’s 451 Market Insight detailing our outlook for the EFSS sector.

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SK Hynix plucks Violin’s PCIe biz

Scott Denne

Contact: Scott Denne

Violin Memory jumps out of the server-side storage business just a year after launching a PCIe flash product. The quick exit – a $23m sale of the division to SK Hynix – comes as Violin dedicates resources exclusively toward returning its storage systems business back to growth (minus the PCIe unit, sales fell 31% year over year to $17m in the most recent quarter).

Violin entered the flash PCIe fray just as serious competition emerged for all-flash storage systems, a dangerous time (as we pointed out in an earlier report ) for a small company with an early lead to divide its attention. Considering the market traction for server-side flash, it makes sense that Violin would jettison that business.

Violin got off to a respectable start in PCIe, hitting $5m in quarterly revenue by its third quarter of PCIe sales, but the market is littered with larger competitors and, as a whole, server-side flash products have attracted scant attention from enterprise buyers. According to surveys last year by TheInfoPro, a service of 451 Research, a full two-thirds of respondents said they had no plans to implement server-side flash. Only 18% of respondents had deployed the technology, up from 11% in the same survey a year earlier.

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GreenBytes picked up by Oracle after flying too close to Sun

Scott Denne

Contact: Scott Denne Simon Robinson

Scorched by Sun Microsystems, GreenBytes finds an unlikely savior in Oracle. The database giant has struck a deal to buy the VDI-focused storage vendor in a deal that we believe delivered a better return than its small customer base would suggest.

Shortly after going to market in 2008 with a NAS appliance built on the open source ZFS file system, GreenBytes was hit with a trademark and intellectual property lawsuit by Sun Microsystems. Though that suit was settled shortly before Sun sold to Oracle in early 2010, GreenBytes pivoted to selling a hybrid flash and disk appliance, but had trouble attracting new venture capital beyond an initial round from Battery Ventures in 2009. In 2012, GreenBytes pivoted again to a VDI-focused storage product and attracted $12m from cleantech investor Generation Investment Management and Battery. Evercore Partners advised GreenBytes on its sale.

As of November, GreenBytes had landed more than 100 customers for its VDI offerings, though it’s unlikely that attracted Oracle. More likely, Oracle was drawn to the company for its inline de-duplication technology built on top of ZFS, the file system that Oracle obtained as part of its acquisition of Sun. Oracle has limited interest in VDI, but GreenBytes’ de-dupe software should boost the performance and efficiency of its ZFS Storage and Exadata appliances.

We’ll have a more detailed report on this deal in our next 451 Market Insight.

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EMC makes another flashy bet

Scott Denne

Contact: Scott Denne

EMC makes another bet on an early-stage flash storage technology with the acquisition of stealthy startup DSSD. The deal comes almost two years to the day after EMC bought into the all-flash array market by purchasing XtremIO. That transaction, and another acquisition aimed at bolstering EMC’s position in flash, both got off to questionable starts.

Like DSSD, XtremIO had yet to bring its product to market when it was acquired by EMC for an estimated $430m in May 2012. Eighteen months passed before that technology was widely released, and even today some of its basic functions are still in beta release. Last summer, EMC bought disk-pooling software maker ScaleIO with the intention of focusing the product entirely on flash, but later backtracked on that strategy and said the software would continue to work on disk as well.

A changing storage landscape that includes the emergence of flash, as well as cheaper scale-out and cloud storage, is having an impact on EMC. Last quarter, its storage product revenue dropped 6.9% year over year, with the decline focused on its high-end products, where sales grew 2% in 2013.

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A tale of two disk strategies

Scott Denne

Contact: Scott Denne

While its competitor Western Digital aims to be the dominant player in flash, Seagate Technology sets itself up to profit from its privileged position as one part of a duopoly in the hard-disk drive market. The two different strategies are playing out in their respective M&A activity, including Seagate’s announcement today that it will buy Xyratex, a struggling maker of hard-disk capital equipment and enterprise storage modules, for $374m in its only acquisition of 2013.

All of Seagate’s recent deals (about one per year) build on a strategy of bolstering its position in the hard-disk drive market in anticipation that growing capacity needs among enterprises will continue to drive a growth in hard-disk sales that will more than offset declining PC sales. (Look for a two-part Impact Report in early 2014 for our take on Seagate’s strategy.)

That’s not to say that Seagate has completely ignored the flash market. In the last quarter it sold more than $100m in flash and hybrid disk products (or about 2% of its revenue). Earlier in the year it invested $40m in Virident, and we understand that it also bid to buy the company, but its offer came up about 10% short of the $685m that Western Digital’s HGST business ultimately paid. However, we gather that Seagate wasn’t interested in bidding for flash-caching providers that were picked up by other disk makers, such as FlashSoft, acquired by SanDisk, or VeloBit, acquired by Western Digital.

The purchase of Xyratex strengthens Seagate’s supply chain with the addition of more in-house manufacturing and testing products, as well as expands its footprint in the enterprise beyond disk drives as it will now be a supplier of storage modules and clustered storage gear for HPC markets. In valuing Xyratex at 0.3x trailing sales, Seagate assigns a multiple that’s in line with its previous two deals — drive maker LaCie (0.4x in May 2012) and Samsung’s hard drive business (0.4x in April 2011).

While Seagate seeks relative bargains on assets that can improve its position in a market that’s increasingly obsessed with costs, its main rival Western Digital has pursued more cutting-edge and expensive technologies. It has spent more than $1bn this year purchasing flash technologies, most notably Virident, which cost it 12.9x projected annual revenue.

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