Storage VAR MTI In Chapter 11, Reforms Services Business

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MTI Technology, storage vendor-turned-storage VAR and partly owned by EMC, has sold its European subsidiary and fired much of its personnel, and is in the process of winding down operations.

However, many of its former employees, and many of its customers, have been saved by the quick resurrection of another solution provider which MTI acquired last year.

MTI, which has had a long history of financial difficulties, on Wednesday said it has filed for bankruptcy protection pursuant to Chapter 11 of the U.S. Bankruptcy Code for its U.S. operations.

At the same time, it has agreed to sell its European operations to Zinc Holdings, a private equity-sponsored investment group, for approximately $5.5 million, subject to approval of the bankruptcy court. It has offices in Germany, Scotland, and France.

Zinc Holdings also has agreed to provide up to $5 million in revolving loans to MTI to allow MTI to continue operation as a debtor in possession under Chapter 11.

Thomas P. Raimondi, MTI's CEO and president, said in a statement, "After evaluating alternatives, we ultimately determined that seeking protection for MTI in bankruptcy will provide us with the best path to effect the sale of our corporate assets, including the sale of our European operations, and the wind down of our operations in an orderly fashion."

Calls to MTI's Tustin, Calif.-based office were not returned.

EMC invested at least $9 million in MTI over the course of at least two funding rounds, the latest of which was in August of 2005.

Another investor in MTI was Canopy Ventures, a Lindon, Utah private equity investor.

Calls to EMC and Canopy were not returned.

MTI in June of last year acquired Collective Technologies, an Austin, Texas-based solution provider which focused specifically on services, in a deal valued at $12 million.

As part of its restructuring, MTI has let go of nearly all of its employees, including a mass firing of personnel last Friday that were working for its services business, formed by the acquisition of Collective.

That spelled opportunity for Ed Taylor, former head of Collective and until Friday head of MTI's services business.

By Monday of this week, Taylor had formed a shell company, rehired nearly all of his former employees at Collective as well as some that had been transferred from MTI to Collective to work in services, and re-incorporated as Collective Technologies.

Collective has agreed to pay MTI a commission of 10 percent of revenue it collects for providing services under certain backlogged service orders and for certain other former MTI clients, according to the Form 8-K MTI filed with the SEC on Friday.

Taylor, who is now the CEO of Collective, said that as MTI moved towards bankruptcy, he and his colleagues moved to recover their former business.

"The advantage to MTI is, we didn't leave MTI clients in the lurch," he said. "If we didn't do this, our clients would have been in trouble on Monday."

Taylor and his colleagues were originally in discussions with MTI to carve out a services business in a more organized way. "But as the bankruptcy accelerated, we made our move fast," he said.

Collective focuses on IT infrastructures, offering clients services related to storage, backup and recovery, Microsoft Exchange, e-mail archiving, data center relocation and planning, and server virtualization with VMware, Taylor said.

In the week since reforming Collective, it has already established independent relationships with EMC, Symantec, Brocade, and Microsoft, he said.

Collective's business model is unusual in that it derives about half of its business from its own direct customers, and about half from those four vendors who use Collective to do some of their services.

It is a model that Collective likes. "We get to see up front a lot of new technology from these vendors," Taylor said. "We see the early technology, and deploy it early. Then we can take that experience to our own midrange customers."

Taylor said that, when Collective was acquired by MTI, he knew a lot of MTI's history, including its move from being a vendor of its own storage line to becoming an EMC-focused storage solution provider. The acquisition of Collective to move into the services business was the next step for MTI, he said.

"EMC at the time was our largest services customer," Taylor said. "EMC encouraged us to enter conversations with MTI with the hope that the marriage of a re-capitalized MTI with our services would realize a good midrange services company."

MTI took a good run at moving into services, Taylor said. "But they had a legacy of losses," he said. "They burned through a lot of cash in their restructuring. They had a European side, and they still had their legacy break-fix business, which most vendors sell to third parties. MTI also had a robust hardware business, plus the new services business through Collective. It's a hard thing to do all of these at the same time."

The tale of MTI is a case study of what many solution providers, the majority of which still focus on hardware, can expect if they try to move into services too quickly, Taylor said. "Everybody talks about how they want to get into services," he said. "MTI took a good swing at it. But it's a hard road to follow. I would caution anyone looking at such a move to ask themselves if they have the stamina. It's not a one-quarter or two-quarter step."

Despite the financial backing of EMC and Canopy, MTI never was a major force in southern California, said Dave Butler, president of Enterprise Computing Solutions, a Mission Viejo, Calif.-based solution provider.

"MT-who?" Butler said. "Those guys have been reborn several times in the last couple of years. We don't see them here at all."

Butler said he is not surprised to see the demise of MTI given the continual fall in the price of storage hardware, which he said has pretty much become a commodity product.

ECS, on the other hand, is growing, Butler said. "We haven't seen any resumes from MTI people yet," he said. "But we'd love to. We're growing fast, and have several positions open."

According to MTI's Form 8-K, MTI intends to liquidate any remaining assets and dissolve following the completion of applicable bankruptcy proceedings.

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