STOR No More: StorageNetworks To Liquidate

The Waltham, Mass.-based company, which trades under the symbol STOR on the Nasdaq, has laid off all its employees except for a small transitional team to oversee the winding down of the business.

StorageNetworks President and CEO Paul Flanagan stepped down but will remain on the board. He is being replaced by Dean Breda, StorageNetworks' general council, according to the statement.

StorageNetworks was born during the dot-com boom and went public on June 30, 2000. The company's IPO saw its share price rocket to $90.25 per share on the first day and then hit $142 on July 19 of that year. However, it has been sliding since, falling as low as 83 cents on Feb. 28, 2003.

The stock recovered slightly since then, rising 21 cents to $1.49 on Thursday on the news that, after liquidation, the company expects to return $1.60 to $1.70 per share to shareholders.

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StorageNetworks, like many other storage service providers (SSPs) which have since folded, was founded to offer a way for clients to outsource the management of their data, which continues to grow at a strong pace. The company invested heavily in developing a storage infrastructure and expected customers to store all their data on storage devices at StorageNetworks' data centers, where management and backups could be handled without customer intervention.

However, the SSP model failed because few enterprises ultimately were willing to move their mission-critical data off-site. Eventually, StorageNetworks transitioned its primary focus to providing software aimed at letting other companies provide a similar service to both external and internal customers. By the end of June, the company had completely exited the managed service business.

The storage-as-a-service market now has two main competitors, Managed Storage International (MSI) and Arsenal Digital Solutions. Rather than investing in their own data centers, however, these two companies work with hosted service providers such as Qwest Communications, AT&T, NTT/Verio and AboveNet, executives at the two companies said.

Also competing in this space are IBM Global Services and EDS. However, these two companies prefer to take over customers' complete data centers, said Walt Hinton, CTO of MSI, Broomfield, Colo.

Hinton said that despite taking over eight or nine of StorageNetworks' managed services customers in the last four months, he was still a bit surprised that the company would fold due to its transforming into a software vendor.

"We knew they were leaving managed services," Hinton said. "They had gone long on storage hardware they never used. ... There was a rumor they might be acquired by EDS, but they had too many liabilities. There's some speculation that [StorageNetworks'] shareholders had their eyes on their store of cash."

Frank Brick, CEO and chairman of Cary, N.C.-based Arsenal Digital, said StorageNetworks' downfall was inevitable. "But it is an awful shame," he said. "StorageNetworks was a premier provider of storage services. But when they hit a bump, instead of focusing on their core competency, they re-engineered the company."

Like MSI, Arsenal Digital stayed away from investing in its own data centers, thereby preventing excess capital expenditures, Brick said.

Both Arsenal Digital and MSI are privately held and maintain they are currently EBITDA-positive. Brick said Arsenal Digital expects to be cash-flow-positive by the end of the year. Hinton did not comment on when MSI would be cash-flow-positive.

Both companies are now focusing on data protection via remote management of storage. "We're optimistic for the future, as long as we focus on data protection," Hinton said. "But people get itchy when you try to take over their data assets."