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EMC Makes $2.25 Billion Isilon Deal to Ward Off NetApp

EMC to Acquire Isilon for $2.25 Billion to Gain Video Storag
EMC wants to lock up one of the independent niche storage vendors after data-storage maker 3Par Inc. was snapped up by Hewlett-Packard Co. following a bidding war with Dell Inc. Photographer: Nelson Ching/Bloomberg

EMC Corp.’s $2.25 billion purchase of Isilon Systems Inc. pushes it deeper into the $19 billion external-storage market and gives it more ammunition against rivals NetApp Inc. and International Business Machines Corp.

Isilon, which EMC agreed to buy today for $33.85 a share in cash, sells so-called scale-out network-attached storage -- systems that can be quickly added to boost space for data, video and digital images. The price was 29 percent higher than the Seattle-based company’s closing stock price on Nov. 12.

With Isilon, EMC expects to generate $1 billion in annual sales from the market by the second half of 2012, more than triple what it currently gets alone. The purchase also would help EMC catch up with competitors’ technology in the scale-out market, said Sid Parakh, an analyst at McAdams Wright Ragen.

Isilon has “a good set of products,” the Seattle-based analyst said. “While EMC has some products in this segment and plans to launch more there, they lag both NetApp and Isilon.”

The deal won’t have a material effect on this year’s earnings, Hopkinton, Massachusetts-based EMC said today on a call with analysts. Buying Isilon will add to earnings, excluding some costs, the following year, EMC said. It expects to complete the deal this year.

Isilon gained $7.48, or 28 percent, to $33.77 at 4 p.m. New York time in Nasdaq Stock Market trading. EMC fell 27 cents to $21.45 in New York Stock Exchange composite trading.

Search for Buyers

Isilon shares had already risen almost fourfold this year before today, spurred by takeover speculation. The company hired Frank Quattrone’s Qatalyst Partners to find bidders, two people familiar with the situation told Bloomberg News last month. Morgan Stanley acted as co-adviser to Isilon.

Skadden Arps Slate Meagher & Flom LLP provided legal advice to EMC while Wilson Sonsini Goodrich & Rosati acted as legal adviser to Isilon.

Storage businesses have become increasingly attractive takeover candidates as large technology companies fill out their product lines. In September, Hewlett-Packard Co. snapped up data-storage maker 3Par Inc. following a bidding war with Dell Inc. The companies are using the acquisitions to bolster their data-center offerings, letting them sell servers, software and storage under one roof.

EMC also faces a threat from NetApp, which has targeted the scale-out market, said Daniel Ives, an analyst at FBR Capital Markets in New York. He has an “outperform” rating on EMC’s shares.

“This is a nice step towards defending EMC’s turf,” he said in a report to clients.

DNA Sequencing

EMC will combine Isilon’s products with its Atmos line to help handle applications that generate massive amounts of information. That includes DNA research, online streaming of movies and tracking earthquakes, EMC said.

While Isilon is first in the scale-out segment of the industry, EMC leads the total market for external storage computers. IBM and NetApp rank second and third, according to Framingham, Massachusetts-based IDC.

The purchase price is 154 times earnings before interest, taxes, depreciation and amortization, compared with the median multiple of 16 times Ebitda for similar deals in the past five years, according to Bloomberg data.

Isilon, which has about 500 employees, has agreed not to solicit bids from other companies, though it can still consider them, according to a filing with the Securities and Exchange Commission. If Isilon terminates the deal, it will pay EMC a $100 million fee, according to the filing.

(EMC held a conference call to discuss the deal today. Go to for a replay.)

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