Dell, Oracle, EMC Said To Consider NeoScale Buy

encryption default

NeoScale in mid-November stopped selling maintenance contracts for its data encryption appliance, and by last week had stopped selling the appliance itself.

Former employees of Milpitas, Calif.-based NeoScale said the company's encryption appliance business started unraveling in mid-October when MTI Technology, a Tustin, Calif.-based storage solution provider, declared Chapter 11 bankruptcy, owing NeoScale about $800,000.

The former employees also said that NeoScale's Board of Directors and its investors looked at the encryption market and saw that it is difficult for a stand-alone appliance vendor to succeed in a market where several other vendors, including tape manufacturers, are implementing encryption in different ways, including native tape encryption, and cut funding for the company.

A former employee who just before Thanksgiving was among the final wave of those laid off in the wake of the NeoScale meltdown, said that as of November 26, no one at the company was handling customer support for either its tape encryption or its KeyVault encryption key management software.

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NeoScale's Board of Directors has already stepped down, and its bankers are currently running the company, the former employee said.

The company had received offers to acquire the company's intellectual property, but those offers were deemed unacceptable, and so the intellectual property is being auctioned, the former employee said.

Before the meltdown, the company was working on KeyVault 2.0, the next generation of its encryption key management technology. The main difference between it and current versions would have been support for IEEE 1619.3, the proposed Standard for Key Management Infrastructure for Cryptographic Protection of Stored Data, the former employee said.

At least three companies, including Dell, Oracle, and Palo Alto, Calif.-based Pretty Good Privacy, have visited the NeoScale office to do due diligence on a possible acquisition, the former employee said. In addition, EMC has been "hovering" near NeoScale, the former employee said.

EMC, Oracle, and Pretty Good Privacy declined to discuss any possible deal due to corporate policies against talking about potential acquisitions, while Dell did not respond to requests for further information.

A NeoScale executive still working with the company said Monday in an e-mailed reply to a request for information that he is unable to share details on NeoScale's current status.

EMC two years ago acquired security software developer RSA Security for $2.1 billion. In February, RSA acquired Valyd Software, a Hyderabad, India-based developer of software that encrypts data at rest and in motion, for an undisclosed sum. RSA also signed agreements to resell appliances and software NeoScale, Network Appliance's Decru division, and Raleigh, N.C.-based CipherOptics.

The former employee said NeoScale was not very forthcoming in talking to customers about the company's situation. "It's really unfair what they did to their customers," the former employee said. "Customers were buying product up to the last minute, but now they have no support."

NeoScale was not the first data encryption vendor to fold. Kasten Chase filed for bankruptcy in mid-2006.

NeoScale's primary competitor, NetApp, got into the business with the acquisition of Decru in June of 2005.

Tim Russell, vice president and general manager of NetApp's storage security business unit, said he would not comment on what happened at NeoScale. However, he said that NetApp's encryption business now includes an installed base of over 600 midrange to enterprise customers and is growing in a healthy way. The majority of that business goes through solution providers, Russell said.

"We are seeing strong growth," he said. "There's still a need for storage security. We often start out with customers who need encryption on their tapes, and then expand with protection of their entire storage infrastructure."