Dell announced Monday plans to acquire IP SAN equipment manufacturer EqualLogic in a $1.4 billion cash deal, which may cause Dell to reconsider its reseller partnership with storage giant, EMC.
EqualLogic develops storage area network (SAN) systems based on the iSCSI standard which allows a SAN to operate on an existing Ethernet network, meaning businesses can lower costs by forgoing the need to install fibre networks that are considered to be expensive.
"Our customers will be dealing with the largest increase in data we have seen in our history over the next few years," Michael Dell, CEO of the Round Rock, Texas-based company, said in a statement. "Leading the iSCSI revolution will help Dell accelerate IT simplification and virtualisation."
Dell, which has slipped a notch in the PC market, has been increasingly turning its attention to storage. Dell's worldwide PC shipments fell almost 7 percent in between Q1 of 2006 to 2007 according to IDC, while Gartner reports Dell has taken a further hit in the US in Q3, falling 5 percent as HP and Apple respectively increased shipments by 16.5 percent and 37.2 percent compared to the same period in 2006.
In September, Dell released its storage area network (SAN) device, the PowerVault MD3000i, designed to allow smaller businesses to move from direct attached storage to an Ethernet connected SAN.
Dell plans to integrate EqualLogic's technology into future versions of its Dell PowerVault storage line, as well as retain the EqualLogic brand for current and future products.
EqualLogic is a relatively small player in the storage market, but ranks third in the growing arena of the iSCSI IP SAN market, behind leaders EMC and Network Appliance, said Bill Choi, an analyst with Jefferies.
"Dell sells a lot to small and medium businesses, which find iSCSI easy to use with their Ethernet," Choi said. "When Dell announced its own MD3000i, that was their entry into iSCSI. They want to grow their business with this new technology and bought the leading pure play with EqualLogic."
IDC estimates the market will grow to $6 billion by 2011. EqualLogic, which in August filed with the Securities and Exchange Commission to go public, reported revenue of $90.9 million for the first nine months of 2007, more than double the $44.8 million generated during the same period a year ago.
That level of growth may bolster Dell's financial performance, given storage accounts for only 4 percent of its overall revenue, Choi said.
The deal is expected to close during the company's fiscal fourth quarter or early into its first quarter.
Shares of Dell were down 1.53 percent in morning trading, at $29.59 a share.
But taking a bigger hit were shares of storage giant EMC, which fell 4.24 percent to $23.51 a share in morning trading. EMC generates approximately 16 percent of its quarterly revenue from its relationship with Dell, which resells its SAN device to small- and medium-size businesses. 35 percent of EMC's flagship Clariion product line is sold through Dell, Choi said.
With Dell's entry into the storage business last fall and given its bolstered presence with the EqualLogic deal, the computer maker may shift its emphasis toward selling its own storage offerings to new customers, than focusing on EMC's products, Choi said.
For EqualLogic, the deal marks the largest cash sale of a venture-backed company, said Christopher Baldwin, general partner of Charles River Ventures, lead investor of EqualLogic.
But he noted not to expect a wave of more start-ups and a feeding frenzy of similarly sized deals in this fairly new market.
"If you take a snapshot and put pen to paper, 18 months later you will see more of these companies emerging, but they would have missed the wave," Baldwin noted.
In the case of EqualLogic, Charles River provided the seed funding back in 2001 and, six years later, the company was gearing up Tuesday to do its road show to prospective IPO investors.
"The decision to sell to Dell was driven by the synergies," Baldwin said, adding, "It would be tough to slug it out with Dell (as a competitor). Dell is ferocious."
