Storage's Special Kind of Deals
The storage industry is awash in deals. On Oct. 14, giant EMC (EMC ) announced that it will acquire content-management software concern Documentum (DCTM ) for $1.7 billion in stock. Just one week later, it closed its acquisition of information-management software outfit Legato, a deal valued at $1.3 billion when it was announced in July.
Big partnerships are also being struck between behemoths eager to play in the growing market for data-storage systems. On Oct. 22 Cisco Systems (CSCO ) and IBM (IBM ) announced an agreement to jointly develop technology that will allow customers to consolidate multiple storage subsystems into one easy-to-manage network -- a sort of holy grail of storage technology known as "virtualization." An important industry conference, Storage Networking World, which will take place in Orlando, Fla., the week of Oct. 27, will provide a steady stream of news of such alliances.
All this dealmaking doesn't represent consolidation in the traditional sense, the kind driven by too many competitors in one space offering commoditized products. "People are simply trying to broaden their product line," says David Hill, vice-president for storage research at Aberdeen Group in Boston.
Customer demand is behind the current wave, say analysts and storage companies. Corporate information-technology departments want their suppliers to simplify storage-networking technology and reduce what can be exorbitant administrative expenses. The total cost of owning a SAN (storage area network) for one year can easily reach $1 million. Soni Jiandani, Cisco's vice-president for storage technology, estimates that only 35% of that is for hardware and software, and 65% for management- and operations-related costs.
Corporate tech departments also want to work with fewer suppliers on storage projects. "Customers want an easier acquisition process," says Mike Gustafson, senior vice-president for worldwide marketing at storage company McData (MCDT ). Instead of having to deal with as many as a dozen different players, "they would prefer to have fewer people at the table who can address a broader range of needs," he says.
Storage-networking technology has advanced to the point that a strong foundation exists onto which new software features can be added, says Alex Mendez, a general partner at venture-capital firm Storm Ventures in Palo Alto, Calif. And since many large storage concerns cut back on research and development after the tech bubble burst, they're likely now to have to buy those new products by purchasing startups. "There has been a gap in product development over the last three years, and a simple way to catch up is to write a check," says Mendez.
In deals announced in August, 2002, for instance, McData bought software companies Nishan Systems and Sanera Systems, and it made investments in Aarohi Communications. New products based on those deals are just coming out now. Brocade Communications (BRCD ) bought Rhapsody Networks last November, and on Oct. 28 will announce that it plans to deliver its first storage switch based on Rhapsody's technology in the first half of next year.
Tom Taulli, founder of research site MergerForum.com, believes other storage-hardware businesses could soon follow EMC's lead and buy content-management outfits. "It's a natural fit. It's also something customers are demanding," he says. "They want not only storage but a seamless way to manage the data."
He believes potential targets are Vignette (VIGN ), Open Text (OTEX ), FileNet (FILE ), and Interwoven (IWOV ), as well as Switzerland's Day Software. On Oct. 27 Hitachi Data Systems, a unit of Japan's Hitachi (HIT ), and content-management outfit Ixos Software announced a joint development and distribution agreement.
Software companies specializing in storage resource management, data protection, and virtualization could also prove to be in high demand. Players prominent in the hot virtualization space are FalonStor Software (FALC ) and StoreAge Networking Technologies, says Aberdeen's Hill.
Smaller storage-software concerns have their own reasons for trying to ink deals with the large hardware companies. The venture-capital industry has funded dozens of storage startups but won't continue to back them unless they have a way to bring their products to market. That might mean selling out to a larger company or striking a deal with a hardware outfit that will integrate their technology.
"We've seen some forced evolution as the [funding] ocean has dried up," says Lawrence Zulch, chief executive of Dantz Development, which makes backup software for small and midsize businesses. It purchased a small business that makes virtualization software in October, 2001.
Despite all the deals announced and on the way, analysts and observers say the industry has a lot more work ahead until it can offer the kind of broad solutions corporate tech departments are looking for. Although Mendez of Storm Ventures says the foundation for that now exists, customers are still waiting for software applications that will provide the equivalent of "walls, wiring, and lights" as well.
"We still haven't seen all the pieces that will go into the final solution," agrees Zulch. "There's still opportunity for companies to be formed to create that." What's happening in storage may only look like consolidation. It's really innovation.
By Amey Stone in New York