Storage Mergers Hit Overdrive
Quantum acquires ADIC, Sun steals StorageTek, Symantec sucks in Veritas, Brocade breakfasts on McData, EMC eats up everybody, and just this week, QLogic snacked on SilverStorm. And those are just a few of the storage mergers taking place in the last year or so. So what's up with all this M&A mania, anyhow?
From a historical perspective, this is business as usual, part of the natural order of things. Western Union is no longer the communications king; upstarts in the telecom and IT fields long ago replaced it. These companies now sit atop the totem pole, working hard to prevent a new wave of upstarts from taking over. Even AT&T, the venerable Ma Bell, went through a long slide before being acquired by her own offspring.
Even within the IT field, some big names have faded from memory in recent times, among them UNIVAC, CDC, Burroughs, Memorex, DEC, Wang and Compaq.
Behind it all is the same old economic imperative: eat or be eaten.
"M&A activity in the storage industry has experienced some of the same ebbs and flows as in other industries, but it may also be a reaction to tougher economic and market environments," says Donna Taylor, an analyst at Gartner. "Either the pie has to get bigger via technology innovation, or the players must fight for a piece of a stable and/or shrinking market by becoming a bigger fish."
In this way, companies strive to merge, acquire or be acquired for a variety of reasons. Some just want to dominant, others to escape domination. Some see mergers and acquisitions as a way to thrive, innovate or expand their portion of the pie. Pricing pressures can make competition even more intense as once-groundbreaking technology becomes a commodity, a clear trend in the storage market in recent years that has forced some to band together to survive. Thus the motives behind mergers are many and varied.
Boom, Bust and Back
As the roaring nineties gathered steam, the number of mergers grew and grew, reaching a peak at the end of the decade. Debacles such as the AOL-Time Warner deal and the Enron collapse tended to leave a bad taste. Financiers and venture capitalists ran for cover.
The spate of M&A activity over the last couple of years, therefore, may well be just making up for years of famine. During the early 2000s, companies focused on bare survival, getting their houses in order, digesting previous acquisitions and keeping a close eye on their budgets.
"During the economic downturn, venture capital took a wait-and-see approach, preferring to hold onto its cash," says Taylor. "As the economy rebounds, the purse strings will continue to loosen and they will invest in what are considered worthwhile investments."
More and more small companies, therefore, find themselves better funded and able to transform their technology dreams into market realities. And many of the mid-sized firms have matured into viable acquisition targets.
Beyond this, another factor is also driving merger madness. Significant market shifts have caused many of the top players to panic. Who in storage talked about security and information privacy in 2001? Yet these have become dominant themes that have prompted all large vendors to adjust their strategies.
EMC, for example, has morphed from a disk array company into an information lifecycle management (ILM) specialist that sees it role more as a general IT player (see EMC Secures Its Future and Storage, IT Converge).
"EMC for two years now has had a clear strategy of moving beyond being a mere storage provider into one that can manage across the enterprise," says Mike Karp, senior analyst with Enterprise Management Associates. "They fully realize that IT is a complete system, and to be completely effective you can't manage a system in pieces."
EMC has a mature acquisition process in place that is continually upgraded. The company has made almost 30 purchases in the last five years, totaling almost $7 billion. Its process spans from candidate identification, through due diligence, to post-acquisition integration. It's no wonder it has expanded steadily over the years.
"When EMC closed the VMware acquisition in January 2004, VMware's revenue for the prior year was approximately $100M," says Tom Heiser, EMC senior vice president of corporate development and new ventures. "Based on our current run rate, 2006 revenue for VMware will have increased six-fold since EMC acquired it."
Karp says that only two others companies are capable of covering the same ground as EMC HP and IBM. None of the three, however, covers everything completely, and all remain lacking in real product integration. But they all have the basic technology in house to get there.
"A key determinant of M&A success is the integration piece," says Taylor. "Very few companies succeed in this area even if the target and the deal itself was well-planned and executed."
One exception may well be Cisco Systems. It has garnered a reputation as the poster child for successful M&A integration. The company has taken part in dozens of mergers over the past decade and has a well-oiled machine in place to take care of this function. An entire Cisco division works solely on mergers. They are involved prior to the purchase to ensure the company and its technologies are compatible. They work out a merger roadmap before any announcements are made. And when the press conferences roll, they are already well along the way to product integration.
"Cisco has a similar strategy to EMC, but on a much more limited scope, as it is trying to do all management through intelligent switches," says Karp. "If it passes through their switches, they want to manage it."
Carving Out a Niche
While the predators at the top of the food chain like EMC, Cisco, Sun, HP and IBM jostle for position and chomp up lesser vendors like a bowl of Kibbles 'n Bits, there is a middle ground where companies seek mergers for a variety of reasons some for survival, others to position themselves to dominate a particular niche.
Quantum, for example, recently completed the acquisition of ADIC. Integration, says Rick Belluzzo, chairman and CEO of Quantum, is going ahead full speed.
"There are a variety of reasons for the recent M&A activity in storage, but one of the key drivers is the need to respond to customers' evolving challenges in managing and protecting their data," says Belluzzo. "In Quantum's case, our recent acquisition of ADIC is about creating the leading global storage company specializing in backup, recovery and archive solutions."
To his mind, storage is tending to polarize into two camps. The OEM storage generalists covered above are trying to be all things to all people. They are served and sometimes fed by small start-ups who provide a significant amount of technology innovation.
"We believe there is a need for a large independent specialist in this market that has the focused expertise, innovative solutions set and scale to serve a worldwide customer base," he says.
As a result of expansion and acquisitions, Quantum now has broadened its portfolio to include disk-based systems, software, devices and services. It has also put in place almost one thousand sales, marketing and service employees in customer-facing roles. The ADIC take over, says Belluzzo, was aided by the fact that it is the company's third acquisition in recent years. So how has it worked out from the end user perspective?
Industrial Color, a digital capture and photo post-production firm in New York City, was an ADIC customer prior to the deal. It used ADIC StorNext software to move data between an Apple Xsan and Windows-based backup systems. It is now building a data center using this same technology fabric along with Quantum PX720 tape libraries.
"After the Quantum-ADIC merger, I called support to activate a StorNext license," says Christopher Mainor, director of IT at Industrial Color. "It's fair to say that you hardly even noticed the technology had changed hands."
It's All About Execution
Oftentimes, it's easy to overlook the subtext and focus on the more obvious factors driving a merger. A merger or acquisition could be an attempt at vertical integration (if not in technology, then in infrastructure) or a determination that it represents the best use of its cash reserves at that moment in time. It might even be an attempt at acquiring an additional customer base, employee know-how, or a brand new services arm to add to a strong software/hardware core.
But once the merger is done, it's the execution that makes or breaks the success of the deal.
"Who will be successful in the storage industry is still unclear," says Taylor. "And so far, no vendor has proved itself to be a break-out success in the area of M&A integration."
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