The Data Storage Gold Rush - Who's Left?

The mad scramble going on today in the data storage market may not be the sort of gold rush that gives us classics like "The Treasure of the Sierra Madre," but it is a gold rush all the same. Shareholders have seen soaring valuations, companies have seen the competitive chess board morph in front of their eyes and outside observers have had plenty to talk about as bids and rumors roil the markets. 

With the recent announcement of a deal between Dell (Nasdaq:DELL) and Compellent (NYSE:CML), it is fair to wonder whether the land grab is close to running its course. There is no doubt that storage is going to be a key component of corporate IT as long as there is IT, but it looks like a combination of scarcity and a need to digest prior deals may eventually calm the market.

The Big Boys
There is no question that there are plenty of options when it comes to corporate-level data storage. EMC (NYSE:EMC) is still a major player in the field, along with competitors like NetApp (Nasdaq:NTAP), IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Dell  and Hitachi (NYSE:HIT). Within this wide array of vendors is an equally wide array of approaches and technologies, ranging from EMC's efforts to meet almost any conceivable storage need to NetApp's much more focused approach.


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Is Brocade Weaving A Winning Tale?

These are Dickensian times for the networking space; perhaps not the best of times for players like F5 (Nasdaq: FFIV), Meru (Nasdaq: MERU) and Aruba (Nasdaq: ARUN), but very strong all the same. On the other side of the ledger, a poor spending outlook at the federal government level led Cisco (Nasdaq: CSCO) to lower its guidance and now the same seems to be true for Brocade (Nasdaq: BRCD). Making matters worse, this quarter highlights that Brocade is still not able to deliver the sort of consistency that a lot of the Street really seems to crave right now. 

An Okay End to the YearIt is often wise to be wary of companies that boast of relatively meaningless accomplishments and the title of this quarter's earnings press release included mention of "all-time record revenue". Despite that yellow flag, revenue did grow more than 5% from the year-ago level, and better than 9% on a sequential basis.

Unfortunately for investors, Brocade is one of the many tech companies that muddies its financial reports with GAAP and non-GAAP reporting. On a non-GAAP basis, gross margins improved nicely on a sequential basis, as did operating margin - though the later was down on an annual comparison. At the bottom line, earnings were weaker whichever way an analyst wants to look - down 27% by GAAP math or 10% by non-GAAP calculations.


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EMC Buys More Storage Space

EMC (NYSE:EMC) is making one thing abundantly clear - if it has to do with enterprise storage, they are going to have a piece of it. From the first Symmetrix back in 1990, to the latest in software/hardware hybrid, EMC has always been at or near the edge of what is possible with large-scale storage. Now the company is buying Isilon Partners (Nasdaq:ISLN) in what may prove to be a stronger foothold in the next major type of corporate data storage technology. 

The Deal
EMC is paying $33.85 a share in cash for Isilon, a deal that represents a 29% premium for Isilon shareholders and a nearly $2.3 billion bill for EMC. With a termination fee of $100 million attached to the deal, though, it is not unthinkable that other bidders could come into the game.


What EMC Is Getting
Isilon is a very small company in data storage - trailing revenue of less than $200 million, compared to EMC's $16.2 billion - but a very promising one all the same. Isilon specializes in highly-scalable, clustered storage systems that store very large continuous files, and has been involved in this scale-out network attached storage market virtually from the beginning. This market exists because unstructured data is not easily handled by traditional systems, but companies involved in life sciences (sequencing data), media (movies) and energy (seismic data) find they need a better way of handling these huge files. (For related reading, see Xyratex An Interesting Data Storage Play.)

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IBM Pays For Speed

Time is money, and IBM (NYSE:IBM) is willing to pay plenty of money to Netezza (NYSE:NZ) shareholders to offer a faster data analytics solution to its customers. (For more stock analysis, see Best Dividend Stocks.)

Before Monday's open, IBM announced an agreement with Netezza where it would pay $27 a share in cash for the smaller technology company. While $27 a share is not a huge premium relative to Netezza's closing price on Friday, the stock had been on a tear since a strong earnings report in late August lifted the shares from a base in the low-to-mid teens. Paying an enterprise value to revenue multiple of almost seven, it is difficult to say that Netezza is selling itself cheaply.

What IBM is Getting
IBM has long since shed its "big iron" legacy and its middleware and data service business are a very significant part of its business. Within that, customers have increasingly turned to companies like IBM, Oracle (Nasdaq:ORCL) and Teradata (NYSE:TDC) to help them integrate their platforms and analyze large volumes of data in ever-shorter times. This is where Netezza comes in; Netezza boasts query speeds that are 10- to 100-times better than more traditional approaches, and its purpose-built data warehouse appliances have made it a strong competitor to the aforementioned Oracle, Teradata and its new owner, IBM. 


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4 Companies That Should Have Sold Out

Mergers and buyouts are part and parcel of the investing experience. While a buyout bid can give a nice return to a short-term investor, longer-term investors often fret that a bid may entice management to sell a company for less than its true long-term value. What is also true, though, is that sometimes managers are unreasonably and unproductively stubborn - refusing to hand over the reins (and their large executive salaries) and allow shareholders to book a profit or own shares in a larger enterprise. (For related reading, take a look at Mergers: The Sign Of Economic Recovery?)

With news swirling around 3Par's (NYSE:PAR) willingness to sell to either Dell (Nasdaq:DELL) or Hewlett-Packard (NYSE:HPQ), there is the sharp contrast of Genzyme's (Nasdaq:GENZ) resistance to a bid from Sanofi-aventis. Let us take a look at examples where shareholders really would have been better-served if their managers had signed on the dotted line and taken the deal. (Find out how you can cash in, read Trade Takeover Stocks With Merger Arbitrage.)

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Shareholders Are Going To Pay For The HP-versus-Dell Ego Battle

As I suspected, the battle between Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) for storage company 3Par (NYSE: PAR) is getting close to the ridiculous. After Dell exercised a provision in its deal with 3Par to match subsequent offers, HP decided to raise the stakes again and bid $30 for the shares.

This pushes the price to about $2 billion, or 10 times trailing revenue. Now, as I have said in prior pieces for Investopedia, 3Par does have some solid products and technology. Its scalable systems are very attractive to companies that either want to try the technology without a major commitment of time and money, or those who have modest initial needs and want a data storage infrastructure that can grow with the company.

But, c'mon ... 10 times sales?

I have got to think that EMC (NYSE: EMC) and IBM (NYSE: IBM) are chuckling a bit over this. 3Par's technology in HP's hands could be dangerous to them (EMC/IBM), but I think you can argue that these companies are offering up a lot of money for the dubious privilege of getting more attention from these larger rivals. I am certainly no IT expert, nor an engineer, but I have to think that EMC and IBM could both develop similarly scalable systems if they really wanted to do so. I know, for instance, that EMC already has some scalable offerings and enhancing them should not be too difficult or expensive.

Ultimately, this bidding battle is brilliant for 3Par shareholders, but HP and Dell shareholders should not be so happy. If either company's CEO can come out and explain why this technology is worth so much and why the company did make a move on 3Par earlier, I would love to hear it. In the absence of such an explanation (likely to come after the battle is won, if at all), I think it is fair to wonder how much of this is about ego and how badly this reflects on the existing underlying businesses of the bidders.

Sometimes these bidding battles work out in the end - Johnson & Johnson (NYSE: JNJ) got into a similar battle a long time ago for Cordis, and I think it was probably worth it in the final analysis. Other times, though, you get a situation like where Boston Scientific (NYSE: BSX) got sucked into a bidding war for Guidant (NYSE: GDT); a move that has certainly not shown itself to be worth the money so far.

Whether or not this deal goes down as another Cordis or another Guidant, I would have some sharply-worded questions for the managers of 3Par's bidders. After all, it was not that long ago that the stock was trading below 4x sales and nobody seemed to care much about it at all.

Disclosure - I own shares of JNJ

3Par Suddenly A Hot Property

It is almost a little hard to imagine that 3Par's (NYSE:PAR) stock spent the last 18 months more or less languishing. Now it seems to be the little black dress of the technology world. 

It was only a week ago that Dell (Nasdaq:DELL) surprised the market with an $18 per share cash offer for this provider of scalable data storage hardware and software, paying an 87% premium at the time. Now Hewlett-Packard (NYSE:HPQ) has stepped up and offered to go one better than Dell. Monday morning HP announced an all-cash offer for 3Par of $24 per share, or $1.6 billion in total.

Although this bid one-ups Dell by about 33%, it apparently does not include a break-up/termination fee. Given that HP could do the deal with its cash on hand, however, the absence of such a contingency may not make all that much difference.  

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http://stocks.investopedia.com/stock-analysis/2010/3Par-Suddenly-A-Hot-Property-PAR-HPQ-DELL-IBM-EMC0824.aspx

Dell Tries To Buy A Brighter Future

F.Scott Fitzgerald is credited with saying "there are no second acts in American lives" and he may as well have been talking about American business. For every Apple (Nasdaq:AAPL), there are at least two Atari's - most companies have their one big shot as a growth company and then settle into a low-growth maturity or fade away entirely. Tech in particular seems to follow this pattern - how many people remember when Ciena, Lotus, and Netscape were the future of the tech sector? 

To borrow another literary metaphor, Dell Computer (Nasdaq:DELL) is not going quietly into its good-night. Once a hot tech stock for its success in the direct-to-consumer PC market, Dell has since struggled to recapture its former glories. Will a multi-year acquisition spree give DELL's shareholders another chance to enjoy above-average growth, or is the company simply frittering away its owners' cash? 


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