Category: storage

Looking past the losses at Carbonite

Brenon Daly

Contact: Brenon Daly

Is Wall Street ready to buy into a company that spends $1 on advertising to bring in just $2 in bookings? That’s one of the key questions around Carbonite, a fast-growing online backup vendor that just filed for its IPO. (We looked at Carbonite’s planned offering in an in-depth report, including projecting its likely valuation when it does hit the Nasdaq later this year.) Carbonite has more than doubled revenue in each of the past two years. And while that is an eye-popping growth rate, it has been fueled by an equally eye-popping spending on advertising.

Consider this: Carbonite shelled out $24m on advertising last year on its way to recording $54m in bookings. (For those of you who like old-fashioned, by-the-book accounting, the $54m in bookings in 2010 equaled a scant $39m in actual revenue for the six-year-old startup.) And to be clear, that $24m was straight advertising spending, which is just a portion of the $33m in sales and marketing spending that it rang up last year. Obviously, that’s not a sustainable ratio, at least not for a technology company that also needs to spend a few million dollars on servers and other equipment each quarter and hopes to run profitably. (For its part, Carbonite hasn’t posted anything close to black numbers.)

That’s not to say that Carbonite won’t be a hit with investors when it does go public. Bulls can point to the fact that the service has attracted more than one million paying users, and those that use it tend to stick with it. (Carbonite puts its retention rate at 97%.) And on the buyside of the IPO, Wall Street has been willing to look past red-stained income statements if the growth rates are high enough. As evidence, we might point to the mid-March offering of Cornerstone OnDemand, a company that has a similar financial profile to Carbonite, though it competes in a vastly different market. After pricing its offering above range and soaring onto the market, Cornerstone currently trades at about 18 times trailing revenue

Autonomy picks up piece of rock from Iron Mountain

Brenon Daly

Contact: Brenon Daly, Nick Patience

Announcing its first acquisition in almost a year, Autonomy Corp has picked up Iron Mountain’s digital assets in a surprisingly rich purchase of a castoff business. Autonomy will pay $380m in cash for the units, which include backup and recovery, e-discovery and digital-archiving software. The transaction effectively unwinds Iron Mountain’s acquisitions of Mimosa Systems and Stratify, deals the records giant had done as a hedge against the digitization of information. As my colleague Nick Patience writes in his report on the move in tonight’s Daily 451, the divestiture puts Iron Mountain almost entirely back in the business of storing cardboard boxes.

For Autonomy, we suspect that the main reason for the purchase is the division’s customer base of 6,000 as well as the six petabytes of data those customers have stored. (Autonomy already has e-discovery and archiving technology, so would be less interested in those Iron Mountain products.) Viewed in that light, the purchase price of $380m, or more than 2.5 times projected revenue in 2011, seems a bit steep. That’s particularly true when we consider that Iron Mountain was under the gun from big shareholders to dump the digital division. On the news, Iron Mountain shares inched a bit higher Monday afternoon, and have now added one-third in value since the beginning of the year.

Slimmed-down LSI catches eyes on Wall Street

Brenon Daly

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

Western Digital goes big in storage

Contact: Henry Baltazar, Brenon Daly

After flirting with a potential IPO, Hitachi Global Storage Technologies (GST) is set to be snapped up by its hard drive manufacturing rival Western Digital (WD) for $4.25bn in cash and stock. The deal would be the largest transaction in the storage industry in more than seven years, and would solidify WD’s position as the biggest hard drive vendor.

Beyond the benefits of consolidated manufacturing and increased market share, the Hitachi GST acquisition provides WD with credibility in the enterprise market, which was the key handicap it had to overcome against its longtime rival Seagate. Wall Street certainly saw it that way, sending WD shares up 14% in heavy Monday-morning trading. (WD indicated that the combination, which is expected to close in the third quarter, would be immediately accretive to non-GAAP earnings.)

We would also note that Hitachi GST’s expertise in enterprise SAS and fiber-channel hard drives was the key asset that led to its partnership with Intel for enterprise-class solid-state disks, and WD will now benefit from having these high-performance NAND flash products in its lineup. In the Hitachi GST/Intel partnership, though Intel manufactures the drives and supplies the NAND flash for the units, the products have Hitachi GST branding and are sold through Hitachi GST’s business partners.

The logic behind that strategy stemmed from the fact that Hitachi GST already had relationships with major enterprise storage and server providers, which would have made it easier for the products to get through qualification cycles at OEM partner sites. With this deal, WD will also attempt to leverage these relationships to build up its market share well beyond the consumer space.

The 451 Group picks up ‘voice of the consumer’

Brenon Daly

Contact:  Brenon Daly

For today’s deal, we move a little bit closer to home: The 451 Group announced today that it has acquired the assets of TheInfoPro, a New York-based advisory and research firm. Founded in 2002, TheInfoPro counts more than 100 organizations as clients and draws on extensive surveys of those IT buyers to get real-world perspectives and forecasts on IT innovation. Focus areas for TheInfoPro include security, storage, networks, servers as well as virtualization.

With the acquisition, TheInfoPro will become a division of The 451 Group, joining the New York City office. (Terms of the transaction weren’t disclosed.) The deal is the third significant purchase by The 451 Group in the past half-decade to expand our offerings around analyzing and advising our clients on the business of IT innovation

The year of the privately held storage supplier?

Contact: Simon Robinson

The storage M&A market is expected to favor smaller private providers this year, as recent activity has reduced the number of available midsize public targets. Indeed, in the past 24 months, Data Domain, 3PAR, Isilon Systems and Compellent have all been taken off the market. And buyout speculation caused by this recent spate of activity has bloated valuations at remaining public firms, such as CommVault, making them less likely to be acquired next.

But while recent public storage acquisitions may have halted the sales of their public peers, they may have actually benefited private suppliers. For example, EMC’s reach for Isilon highlighted the growing requirement for high-scale storage systems in markets where the exponential growth of highly rich – or ‘big’ – data is a key pressing challenge. Indeed, that deal could be important in refocusing attention on the remaining privately held players.

We took a look at several of the remaining private targets in a recent Sector IQ and noticed that would-be buyers still have several options to choose from. Though the IPO window has been closed for a couple of years, there are many attractive storage specialists that are fairly mature on both the product and go-to-market fronts, and a closer examination reveals a number of storage system specialists that were formed in the late 1990s that are still making headway today. Click here for our full report on potential targets in the storage sector.

Qatalyst strikes again, but bigger

Brenon Daly

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

Dell’s less than ‘compellent’ bid

Brenon Daly

Contact: Brenon Daly

In what would be the third significant acquisition of a publicly traded storage vendor in the past four months, Dell said Thursday that it would offer $27.50 in cash for each share of Compellent (see our full report). The storage company reported 32.8 million shares (on a diluted basis) in its latest quarterly filing, giving the proposed transaction an equity value of $902m. (The final share count would likely be higher due to options vesting and so on.) But if we assume an equity value of $900m, the enterprise value of the deal would come in at roughly $840m. That’s 5.4 times Compellent’s sales of $155m in 2010 and 4.3x its projected 2011 sales of $195m. We would note that valuation is less than half the level commanded in the recent takeouts of both 3PAR (a bidding war pushed the level to 11.2x trailing sales) and Isilon Systems (12.8x trailing sales).

Of course, valuation is very much the issue in this ‘take-under.’ Dell’s bid of $27.50 compares to Compellent’s previous closing price of $33.65. Clearly, much of that advance came as a result of acquisition speculation, as Wall Street watched other storage vendors of roughly the same vintage get taken off the market. On its own, Compellent started the year trading at roughly $23, dropped to about $12 after whiffing its first quarter, and only got back above $20 in late October. Shares closed Thursday at $29.04 (on volume that was seven times heavier than average), indicating that investors aren’t necessarily willing to sell their shares to Dell at a lower price than they can get from one another.

Blue-sky thinking on a bidding war for Isilon

Brenon Daly

Contact: Brenon Daly

Based on the two previous multibillion-dollar deals in the storage industry, we should be bracing for a bidding war around Isilon Systems. Recall that Data Domain last year and 3PAR this summer each attracted after-the-fact suitors that drove up the price on both by more than a few dollars. But in the case of Isilon, we don’t actually see the process going to a public auction.

For starters, there’s the not-insignificant matter of the buy-in bid, which currently values Isilon more richly (on a price-to-sales ratio) than either Data Domain or 3PAR. (As we note in our full report on EMC’s planned purchase, Isilon is being taken off the market at its highest-ever price, roughly five times the level where the company started the year and roughly twice where it traded just three months ago.)

Setting aside Isilon’s acrophobia-inducing valuation, which company could we imagine putting in a topping bid? Admittedly, that requires a rather vivid imagination, but one name we could come up with is Dell. (My colleague, Henry Baltazar, looked at Isilon and other potential targets for Dell in a recent report.) The company has already demonstrated a willingness to spend big to build out its storage portfolio, taking home EqualLogic three years ago and making an unsuccessful run at 3PAR this summer. (If nothing else, Dell’s effort to land 3PAR signaled that the tech giant doesn’t appear content to simply continue its long-term reliance on EMC for storage business. We suspect that marriage of convenience may well be on the rocks.)

Not that we necessarily expect it to happen, but Isilon would nonetheless bring Dell a fast-growing storage vendor (roughly 60% revenue growth for 2010) and a solid roster of more than 1,500 customers, which is roughly twice the number it would have picked up with 3PAR.

Granted, there would be some overlap with the NAS technology Dell obtained with Exanet earlier this year. But Isilon would significantly enhance that, as well as fit well with Dell’s more recent storage purchase, Ocarina Networks. (Isilon and Ocarina actually had a partnership, putting Ocarina’s digital image de-duplication technology in front of Isilon. That’s particularly useful for storage requirements for media and entertainment companies, which account for one-third of revenue at Isilon.) Again, we highly doubt that Dell plans to start a bidding war for Isilon. But it’s enough to get us thinking.

Isilon and 3PAR: strikingly similar storage sales

Brenon Daly

Contact: Brenon Daly

EMC’s planned purchase of Isilon Systems comes as the second storage acquisition valued at more than $2bn in just three months. In fact, it lines up rather closely on a number of fronts with the other recent big-ticket storage deal, Hewlett-Packard’s pickup of 3PAR. For starters, the adviser. Qatalyst Partners got sole print for helping to sell 3PAR, and also had a hand in the process for Isilon. (Morgan Stanley and Qatalyst teamed up on the sell side.)

In terms of financial results, both Isilon and 3PAR are very similar. The two vendors were both generating about $200m in trailing revenue and only modest amounts of cash flow at the time of their acquisitions. (Both also had slightly more than $100m in cash on hand, thanks primarily to their recent IPOs.) That means both Isilon and 3PAR secured a valuation of more than 10 times trailing revenue in their sales to EMC and HP, respectively. If anything, Isilon is garnering an even richer valuation at 12.8x trailing 12-month sales and 8.7x projected 2011 sales.

And finally, both Isilon and 3PAR are being taken off the market at their highest-ever valuations, with acquisition offers of about $33 for each share. (That was the exact clearing bid for 3PAR, which came after two rounds of bumped bids, while Isilon shareholders are set to pocket $33.85 for each of their shares.) Given that Isilon and 3PAR were trading in the single digits just a few months before their acquisitions, shareholders in both storage vendors have reason to smile.