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Dell’s Christmas Storage Shopping List

Now that the bidding war between Dell and HP for 3PAR has subsided with HP emerging the victor, the question becomes, “Which storage company is on Dell’s 2010 Christmas shopping list?” While there are still a good number of storage companies available, when one takes a hard look at which companies are the best fit for Dell, the list gets pretty short pretty quickly.

There are potentially six storage companies that are in play for Dell. By being in play, these companies have to provide storage technology that complements what Dell already owns and will enable them to successfully replace the current line of EMC CX4 storage that they resell.  These six companies are:

First, NetApp seems an unlikely acquisition target for a few reasons. The most obvious obstacle to Dell acquiring NetApp is NetApp’s share price. As of September 9’s closing share price, NetApp now has a market value of over $16 billion which puts it about 2/3 of Dell’s current market value.
The other major obstacle is that there is a great deal of overlap between their two storage portfolios. Dell has its EqualLogic line of iSCSI storage which competes directly against the FAS2000 and even arguably against the FAS3100 series when a cluster of EqualLogic arrays are used. So while all of the FAS series offer NAS interfaces and support FC plus it offers the high end FAS6000 that would enable Dell to compete at the enterprise level, a NetApp acquisition would put the future of some of Dell’s existing storage products in question – especially the EqualLogic line.

So while NetApp has a great cloud storage story, NetApp already appears to be out of Dell’s reach from a financial perspective plus it would negate Dell’s investment in some of its existing storage products.

Hitachi Data Systems (HDS) was until a few days ago a company that I had not really considered in play from an acquisition perspective. But a recent article that appeared on CRN suggested that HDS might be a potential acquisition target for Oracle now that HP’s former CEO Hurd is at the helm. So assuming HDS is in play, does it make sense for Dell to acquire them?

My general sense is probably not. HDS does have its high end Universal Storage Platform (USP) that Dell lacks and HDS also offers its midrange line of AMS storage that complements rather than competes against Dell’s EqualLogic line of storage.
The larger difficulty is extracting HDS from its Japanese parent, Hitachi Corporation.  Hitachi has made a substantial investment into HDS over the years and trying to remove all of those hooks that Hitachi has already set in HDS strikes me as a very messy and lengthy acquisition proposition for Dell if it were to ever attempt it.
Xiotech is the next storage company that Dell may consider from an acquisition perspective and which has also been rumored to be in play. Xiotech is a storage company that has been around for at least a decade and has a nice set of features on its Emprise storage array but Xiotech is not a company that I would think is at the top of Dell’s wish list this Christmas for two reasons.

First, Xiotech has put a lot of emphasis on improving the wear and tear of disk drives within its systems with its ISE technology such that Xiotech is one of the few if not the only storage manufacturer that offers a 5 year warranty on its storage systems. This is great idea but to a large degree they have solved a problem that most users do not care about. Or, if they do care about it, are not going to pay a premium to obtain which is what Xiotech is asking them to do. Rather it is other storage companies that have to fix failed disk drives that are probably more interested in Xiotech’s ISE technology.

Right now end users care about cloud storage with its scalability and flexibility attributes and in this sense Xiotech has failed to make any case at all that it has a cloud storage story. Further, its storage systems have never been considered a high end midrange array with its Emprise storage system only achieving an average score and ranking in the recent DCIG Midrange Array Buyer’s Guide. So by acquiring Xiotech Dell would not gain the technology nor the story that it needed to compete in the enterprise cloud storage space.

Nexsan Technologies is an interesting play in this regards. While it is often thought of as “economy storage”, DCIG found Nexsan’s DATABeast storage array to be the best enterprise midrange array among the more than 70 models that DCIG evaluated.

Further, Nexsan offers midrange models that span just about the entire midrange array space with its i400 Series, SATAbeast and SASbeast and its entry level SASboy and SATAboy models. If anything, DCIG found Nexsan to offer the most comprehensive selection of midrange arrays in the market place with a model for just about any need that a company may have.
Yet in this particular scenario as Dell looks for a company to acquire, this may actually preclude Nexsan from being a viable candidate. It is not that Nexsan does not have good products – it does. But because some of its models – most notably the Series i400 and the SASboy and SATAboy models – compete directly against the Dell EqualLogic and PowerVault storage lines, Dell would essentially need to pay up to get its hands on Nexsan’s high end DataBeast storage system. I see this as unlikely.

So this quickly brings the list of candidates that Dell may be looking to acquire to just two: Compellent and Pillar Data Systems. Of these two, Compellent would seem to be on the surface the more logical of the two. It is already publicly traded (market cap around $500 million), it scored the highest in the 2010 Storage magazine quality awards and it is has a growing user base.
Yet with the 3PAR prize now off the table, is that really enough to make Compellent a compelling acquisition target for Dell? While Compellent lacks some of the high end features that Dell is going to need to sell into enterprise environments, it does offer a unified storage play (NAS and SAN) that will likely become essential in enterprise cloud storage environments.
So is Compellent a likely acquisition target for Dell? Absolutely. But is it the best option? Not necessarily.

Here’s why. Pillar Data Systems is still
hanging out there and while it lacks the visibility and user base that Compellent may have, the Pillar Axiom 600 offers many if not all of the same technical features that Compellent offers. It is for these technical reasons that Dell may find Pillar a more attractive acquisition target.
Visibility and customer base are not necessarily what Dell is looking for at this stage of the game. After all, who outside of the storage industry really knew about 3PAR until a few weeks ago? The same holds true here. If Dell cares primarily about the technology, why should it pay a significant premium for Compellent (let’s say $1 billion) when it can buy Pillar and get the technology it needs.

Either Compellent or Pillar will do more than an adequate job of filling the high end niche in Dell’s storage portfolio plus neither will directly compete with Dell’s EqualLogic or PowerVault lines. But Pillar may represent a better deal for Dell at this juncture because Pillar is better positioned to serve the high end sector of the market.

In fact, if Oracle is really considering a storage acquisition now that Hurd is at the helm, Dell can again attempt to parlay some of the management turmoil at Oracle into a means to acquire one of these two storage companies at a lower price than it might have to pay in a few months.

I also realize there are those who argue that Pillar is Larry Ellison’s storage toy and that it will eventually be acquired by Oracle. Granted, that is possible but that is not a slam dunk either. If Ellison holds as much stock in Pillar as many allege (I do not know), that may create some logistical problems for Oracle if it tries to acquire it.

So in terms of who Dell acquires – I see Compellent and Pillar Data Systems as being the two companies on Dell’s short list for Christmas though I give a slight edge to Pillar since it offers technology that more closely resembles 3PAR and will likely provide more value than Compellent at this time. In terms of a dark horse, Nexsan certainly could be a company that Dell is considering while I see Dell completely staying away from HDS, NetApp and Xiotech.


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