Tag: storage

A (Big) Blue-colored Sun?

Brenon Daly

Contact: Brenon Daly

Just two days after Cisco took the fight to its longtime allies in the server wars, IBM is now looking to buy some ammunition of its own. Big Blue is reportedly mulling a $6.5bn bid for Sun Microsystems, according to The Wall Street Journal. The deal would be the largest tech transaction (excluding telecom M&A) since Hewlett-Packard jabbed at IBM’s giant services division, paying $13.9bn for EDS last May. If it comes to pass, a pairing of IBM and Sun would also radically change the battle lines in the broader fight to build out datacenters, specifically around server, storage and software offerings.

Take the server market. If the deal goes through, a combined IBM-Sun would dominate the high-end, RISC-based, Unix-based symmetrical multiprocessor server market, leaving HP a distant third. However, one point that might pose a challenge for Big Blue is how long it would want to continue with Sun’s Sparc architecture, a direct clash with its own Power chips and System-p servers. Turning to storage, IBM is probably less excited about Sun’s assets in that market. Sun’s storage business has been languishing in the doldrums for years, despite Sun supporting it with its largest-ever acquisition, its mid-2005 purchase of StorageTek for $4.1bn in cash. Nonetheless, there are probably enough enterprise customers locked into Sun’s high-end, mainframe-centric tape business to interest Big Blue. And in software, IBM and Sun are both committed to open source, although we would add that they have slightly different models for monetizing their investments there.

Of course, there’s a chance that the reported talks may not result in a deal. However, we would note that Sun shares are behaving as if it will go through, soaring nearly 80% in early Wednesday afternoon trading to $8.80. That’s essentially where they were last September. That fact probably won’t be lost on Sun’s largest shareholder, Southeastern Asset Management. The activist investor, which has indicated that it talked with Sun to explore a possible sale of the company, among other steps to ‘maximize shareholder value,’ holds some 20% of Sun stock, according to its most-recent SEC filing.

Barracuda bites again

Brenon Daly

Contact: Brenon Daly

A ravenous eater, Barracuda Networks has now gobbled up four companies in the past 14 months. (And that doesn’t even count the privately held security company’s unsolicited bid in May for publicly traded Sourcefire, the Snort vendor.) Barracuda’s latest bite is backup and recovery company Yosemite Technologies. The company will be lumped in with the technology Barracuda picked up in November 2008 when it bought another backup vendor, BitLeap.

As we have chronicled, Yosemite evolved from a tape-based backup vendor to a disk-based one, and then added technology for continuous data protection for notebooks and laptops with the acquisition of early-stage FileKeeper. We understand that Yosemite, under the leadership of storage veteran George Symons, had been investing heavily in commercializing the technology. However, we suspect that fully realizing the value of the FileKeeper technology would have likely required another round of funding, which is tough to come by these days.

Instead, Yosemite opted for a sale to Barracuda. Terms weren’t disclosed, but a Barracuda insider once characterized the company’s approach to M&A to us this way: ‘We don’t mind picking through the boneyard.’ Barracuda has already built a powerful distribution channel to SMBs, so it just wants more products to push through that. With data protection covered, where might Barracuda look next? Our bet is that it is still interested in WAN traffic optimization (WTO). As we have noted, Barracuda CFO David Faugno knows the market well, having served as the top numbers guy at WTO vendor Actona Technologies before its sale to Cisco.

Barracuda’s deals

Date Target Rationale
September 2007 NetContinuum Web application security
November 2008 BitLeap Backup and recovery
November 2008 3SP SSL VPNs
January 2009 Yosemite Technologies Backup, data protection

Source: The 451 M&A KnowledgeBase

Dell’s deals

Brenon Daly

Contact: Brenon Daly

Dell picked up one services company last week, even as rumors were swirling that the company might be eyeing another, larger services deal. Dell said Friday that it would hand over $12m in stock to acquire four divisions from Allin Corp, an IT consulting shop that trades on the Nasdaq’s bulletin board. Allin, which is profitable, reported revenue of some $22m for the first three months of 2008.

The asset buy from Allin was Dell’s first acquisition in almost a year, following last February’s $155m purchase of MessageOne. However, rather than the Allin deal, the talk last week about Dell’s M&A was more focused on reports of whether the company is planning a play for storage-consulting firm GlassHouse Technologies. That company filed an S1 a little more than a year ago, but has only amended it once since then. GlassHouse was looking to raise $100m in the offering, which was slated to be led by Goldman Sachs.

While Dell has been active in building out its services portfolio through acquisitions (notably, Everdream and SilverBack Technologies in 2007), we would note that the company might face some difficulties in preserving impartiality at an independent GlassHouse if it were to pick up the storage consultant. The reason? Dell might be interested in pushing its own EqualLogic gear, which it bought in November 2007 for $1.4bn (which stands as the company’s largest-ever deal). Speaking of EqualLogic, there are a number of common threads that tie it to GlassHouse. Both companies are based in the Northeast, have nearly 30% of their equity owned by venture firm Sigma Partners and tapped Goldman to lead their offerings.

Recent Dell acquisitions

Date Company Deal value
January 2009 Allin Corp (assets) $12m
February 2008 MessageOne $155m
December 2007 The Networked Storage Company $31m
November 2007 Everdream Not disclosed
November 2007 EqualLogic $1.4bn

Source: The 451 M&A KnowledgeBase

NetApp: Barenaked savings

Brenon Daly

Contact: Brenon Daly

What do the Barenaked Ladies and SnapMirror for Open Systems have in common? Well, both have been canceled recently by NetApp in a bid to save money as growth rates at the storage giant continue to head south. The company is currently more than halfway through its fiscal year, which wraps at the end of April, and its projected growth rate of 9% is shaping up to be just half the level it was last year (18%), which was half the level it was the year before that (36%). And given the economic environment, estimates may well decline again between now and when it actually reports results.

Like many companies facing the current recession, NetApp’s answer has been to cut costs. In October, it scratched plans for its user conference, NetApp Accelerate (the Barenaked Ladies had been booked to play one night at the event, which was slated for February). And then last week, NetApp said in an SEC filing that it was shuttering the SnapMirror for Open Systems product line. It will take a charge of as much as $20m (roughly two-thirds of that as a straight write-down and one-third for possible payments for facilities closures and severance agreements).

SnapMirror came with NetApp’s pricey acquisition of Topio in November 2006. The company paid $160m for Topio, which we understand was generating less than $10m in sales. The curtain will fall on SnapMirror before the end of NetApp’s fiscal year, which should help its cost structure for the year. NetApp could certainly use a boost in this area. The company runs at just a 10% operating margin, and has seen the increase in operating expenses outstrip the increase in sales during the first two quarters of its current fiscal year.

Select NetApp acquisitions

Date Target Deal value Rationale
January 2008 Onaro $105m SAN management software
November 2006 Topio $160m Disaster-recovery software
June 2005 Decru $272m Storage security
November 2003 Spinnaker Networks $300m High-end storage

Source: The 451 M&A KnowledgeBase

Corporate castoffs

Brenon Daly

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.

Changing channels

Brenon Daly6 Comments

In the hyper-competitive storage market, it seems that one vendor’s pain is another vendor’s gain. We’ve heard from three market sources recently that Dell’s largest-ever acquisition — its $1.4bn purchase of EqualLogic — has hit some difficulties around defections and uncertainties from the SAN vendor’s existing channel partners. Resellers who pushed EqualLogic’s offering in the past are worried about being crushed by Dell’s powerful direct-sales machine, as has happened to some of Dell’s ‘partners’ in the past.

Based on the recent numbers posted by rival SAN vendor Compellent Technologies, there may be something to those concerns. Compellent, which recently signed up its 1,000th customer, said second-quarter sales surged 74% to $21m — which is about what they were for the first two quarters of 2007 combined. (The performance, along with the forecast for profitability for the rest of the year, helped spark a 20% rally in the company’s shares over the past month.) At a recent investment banking technology conference, Compellent CEO Phil Soran told us he’s looking to poach EqualLogic’s channel partners. We’ve heard similar plans coming from rival storage player Lefthand Networks.

How well Dell is able to balance the sales channels for EqualLogic will go a long way toward determining how much of a boost the acquisition will give to its emerging push into storage. Already, the return on EqualLogic is made more challenging by the fact that Dell bought it literally at the top of the market. The day that Dell announced the acquisition, the Nasdaq hit a level it hadn’t seen since early 2001. (The index is currently off 14% since then, after having dropped as much as 23% from its early-November highs.) To make its high-priced acquisition of EqualLogic pay off, Dell is going to have to work hard to keep its new SAN rivals from siphoning off channel sales.

Post-acquisition decapitation

Brenon Daly

The write-offs from wrong-headed acquisitions just keep coming. And we don’t mean just financial write-offs. Instead, we’re referring to the practice of a company’s board ‘writing off’ the executives who crafted a deal. This week’s high-profile example came when Alcatel-Lucent finally tossed overboard the two architects of ‘la grande fusion.’ Since that deal was announced in April 2006, the combination has incinerated some $20bn over shareholder value, leaving the telco equipment vendor with a market capitalization of just $13.6bn. (That’s less than the sales the company posted in 2007.) That two-year performance finally got Serge Tchuruk, the company’s chairman who represents the Alcatel side of the combination, and Patricia Russo, the Lucent legacy, shown the door.

This house-cleaning at Acaltel-Lucent comes just two weeks after AMD kicked Hector Ruiz upstairs. In virtually the same breath that AMD announced Ruiz would be relieved of his CEO post but continue as chairman, the company said it will divest much of the business it picked up with its $5.4bn purchase of graphics chip maker ATI Technologies. Announcing the deal two years ago, Ruiz said his combination offered ‘limitless’ possibilities for innovation. Instead, the future of AMD looks rather limited, in large part because of the $2.5bn it borrowed to cover its disastrous purchase of ATI. AMD’s total debt stands at $5bn, compared with just $1.6bn in cash.

Meanwhile, a chief executive who we’ve always thought must be on the hot-seat for a misguided acquisition appears to have gotten a bit of a reprieve this week. Symantec CEO John Thompson said Wednesday that fiscal first-quarter sales of its backup products outpaced overall revenue growth. That reverses the recent weakness in the company’s storage offering, which Symantec acquired with its $13.5bn purchase of Veritas in December 2004. Wall Street applauded the company’s report, with shares up about 10% since Wednesday. Still, Thompson has yet to recognize much value from the three-and-half-year-old purchase of Veritas. Symantec shares, which changed hands at $21.74 midday on Friday, are still about $6 below where they were when the company picked up Veritas. Perhaps that goes some distance to explaining the loose rumors this week that something big – possibly the much-discussed divestiture of the storage business or even an outright sale of the company – was brewing at Symantec.

Leading the acquisition

Deal Stock performance since deal Status of acquiring company CEO since deal
Symantec-Veritas, Dec. 2004 Down 35% John Thompson, CEO since April 1999, continues to serve
Alcatel-Lucent, April 2006 Down 61% CEO Russo and chairman Tchuruk ousted this week
AMD-ATI, July 2006 Down 77% Long-time CEO Hector Ruiz replaced in mid-July
Secure Computing-CipherTrust, July 2006 Down 51% Chairman and CEO John McNulty replaced in April

Source: Company reports, The 451 M&A KnowledgeBase

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase