VARs Say Dell's EqualLogic Acquisition Could Backfire


Dell, Round Rock, Texas, on Monday said it planned to acquire EqualLogic, a Nashua, N.H.-based developer of iSCSI SAN technology, as part of a plan to strengthen both its storage technology and its nascent channel program.

EqualLogic had been on the final steps of the IPO trail, with plans to go public on the NASDAQ Exchange under the symbol EQLX.

Michael Dell, chairman and CEO of the company that bears his name, told CMP Channel earlier Monday that EqualLogic will be a catalyst for the company's channel program. "We're going to build on what EqualLogic has started," he said.

EqualLogic could give Dell a good start on the channel, especially in the storage market. According to the Form S-1 that EqualLogic filed with the Securities and Exchange Commission (SEC) and amended last month as part of its pre-IPO planning, the company depends on "value-added resellers and other distribution partners" for substantially all of its revenue. One of those partners, CDW, accounted for 14 percent of its EqualLogic's total revenue during the first nine months of 2007.

Sponsored post

EqualLogic also called a disruption to its channel a major risk going forward. "Our failure to develop and manage, or disruptions to, our distribution channels would adversely affect our business," it said in the S-1.

That could very well happen, said solution providers who do substantial business with EqualLogic.

Dave Hiechel, president and CEO of Eagle Software, a Salina, Kan.-based storage solution provider and EqualLogic partner, said he had been looking forward to buying EqualLogic stock during its IPO.

"I was excited about the prospect of buying EqualLogic stock," Hiechel said. "But in 15 minutes I went from excited to worried. It's not the best news I've had on a Monday morning."

While Michael Dell said that his company will not take EqualLogic sales direct, it will be interesting to see how Dell's sales teams will resist the temptation to do so.

"We have some big EqualLogic accounts that are also Dell accounts," Hiechel said. "We'll have to see if they can avoid the temptation of saying, 'Oh, you're buying Dell? Well, we also have EqualLogic.'"

Hiechel, who said he first heard of the planned acquisition from another storage vendor, Eden Prairie, Minn.-based Compellent Technologies, which was looking to take advantage of Dell's acquisition of EqualLogic to sign on new channel partners, said he won't be dropping EqualLogic right away.

"We're not going to jump ship," he said. "We have a lot of investment in EqualLogic training and demo hardware. So we're not changing unless Dell breaks EqualLogic."

Another solution provider, who asked to remain anonymous, said his company is in a wait-and-see mode.

The solution provider, whose company does "substantial" business with EqualLogic, said he expects some fallout from Dell's acquisition, but that it is too early to tell what might happen.

"I'm not nervous," the solution provider said. "We do a lot of EqualLogic. But it's not like, if they go away, our business will go away. We're hearing that Dell would be interested in EqualLogic's channel. EqualLogic has a lot of good channel partners."

Others in the channel are not waiting and seeing.

A third solution provider, who asked to remain anonymous, said that his company will continue to finalize EqualLogic deals that are close to completion, but is instructing its staff to start moving deals early in the process to instead switch them over to LeftHand Networks, Boulder, Colo., and FalconStor Software, Melville, NY.

"As soon as the dust settles on this, we're dropping them," the solution provider said.

The solution provider said that LeftHand offers similar modularity in its storage offerings compared to those of EqualLogic, while FalconStor offers more dynamic features and scalability. Other smaller companies, such as Los Gatos, Calif.-based data encryption and compression appliance vendor Hifn, could also benefit from the news.

"This is the jackpot for all the other players in this space," the solution provider said. "It's pay dirt for LeftHand, FalconStor, even Hifn. If LeftHand and FalconStor and the others are smart, they can do well. But they should strike fast."

Dell appears to be looking for the next VMware, the solution provider said, referring to the server virtualization vendor acquired by Dell's storage partner, EMC. EMC this year spun off 10 percent of VMware in a highly-successful IPO.

"However, EqualLogic has a lot of other competitors in their space," he said. "They don't dominate like VMware did. I don't see any upside for Dell unless they are possibly looking to do an IPO later."

John Zammett, president of HorizonTek, a Huntington, N.Y.-based storage solution provider, said he is glad he decided to sign up with Network Appliance rather than EqualLogic.

"I'm ecstatic about the acquisition," Zammett said. "EqualLogic was killing us on opportunities in the mid-Atlantic. Dell can't make it any better for them."

For HorizonTek, the acquisition represents more than just a better chance to compete against EqualLogic. "The first thing we said was, let's try to get the local EqualLogic guy," he said. "There'll be some jumping ship. We know what Dell is all about."

EqualLogic's products focus mainly on the iSCSI market, unlike many of its competitors' products which offer iSCSI and Fibre Channel SAN connectivity and which also operate as NAS products.

This is not Dell's first foray into the iSCSI market. The company in September introduced its first iSCSI array, the PowerVault MD3000i, a follow-on to its MD3000 storage array with the addition of an iSCSI front-end.

An EMC spokesperson said EMC, which supplies Dell with most of its storage products via its Clariion line, anticipates no change in its relationship with Dell.

Dell has always had its own PowerVault line even as it partnered with EMC, the EMC spokesperson said. The main difference now is, instead of focusing on OEMing storage technology for the low-end line, it now has its own intellectual property, the spokesperson said.

Analyst firm Robert W. Baird said in a written opinion that the acquisition gives Dell a low-end storage vendor with little short-term impact on its relationship with EMC, but that the long-term impact is more uncertain.

Daniel Renouard, an analyst at Baird, also said his company expects Dell to eventually replace LSI, Dell's OEM partner for its MD3000i, with the EqualLogic product family.

Some in the channel said that $1.4 billion seems a lot to be paying for EqualLogic, especially given EqualLogic's track record. In its Form S-1, EqualLogic said its revenue for the first nine months of 2007 was only $90.9 million, but up from its revenue in all of 2006 of $68.1 million. 2007 is the first year in which EqualLogic is showing a profit, according to the S-1

EqualLogic would not be Dell's first storage acquisition. The company purchased storage networking company ConvergeNet Technologies in 1999, an acquisition it later failed to capitalize on. ConvergeNet was Dell's first-ever acquisition.