Storage M&A Activity Shows Early Strength In 2010

storage virtualization software

Dot Hill Systems, Carlsbad, Calif., on Tuesday said it has entered into a definitive purchase agreement to acquire Cloverleaf Communications, a developer of software that uses virtualization technologies to allow the building of scalable heterogeneous storage infrastructures.

Meanwhile, financial investment publisher Barron's last week wrote that 3PAR, a Fremont, Calif.-based developer of storage arrays that use virtualization and thin provisioning technologies to allow customers to quickly scale their storage, is a prime acquisition candidate by companies looking to increase their presence in the primary storage market.

The news about actual and potential storage vendor acquisitions so early in 2010 follows a strong merger and acquisition push the storage industry experienced in 2009.

This included HP's proposed $2.7 billion buy of networking vendor 3Com in a move to converge storage and data networking and hit back against Cisco's advances in that part of the market.

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Also huge in dollar-terms was EMC's $2.1 billion acquisition of Data Domain after a prolonged bidding war with NetApp.

Smaller acquisitions included storage software vendor Arkeia Software's buy of Kadena Systems to add data deduplication capabilities to its backup software, remote backup storage vendor eFolder's buy of the DoubleCheck e-mail management and security business of Network Management Group, and QLogic's purchase of Ethernet adapter vendor NetXen to bring IP and storage networking together.

Dot Hill's planned acquisition of Cloverleaf gives the storage array vendor a developer of heterogeneous storage virtualization and unified storage technologies.

The acquisition will help Dot Hill move away from its focus on entry-level storage hardware and start to compete with companies like FalconStor and Compellent, which offer value-added storage software capabilities, said Andy Mills, vice president of marketing and business development for the company.

Cloverleaf is the developer of the Intelligent Storage Network (iSN) software, which works on industry-standard x86-based server hardware to provide unified SAN/NAS storage with a full array of services including multivendor storage management, snapshots, virtual replicas, mirroring, thin provisioning and tiered storage. The software works over both Gbit Ethernet and Fibre Channel networks.

It is a big move for Dot Hill and its partners, Mills said. A typical Cloverleaf implementation starts at about $100,000, and was traditionally done by a system integrator or consultant with heavy involvement. This compares to Dot Hill's traditional business model revolving around a $15,000 or $20,000 hardware sale.

"This puts us back in the mainstream," he said. "It makes us more Compellent-like, more FalconStor-like, and lets us compete with companies like Dell's EqualLogic and [Hewlett-Packard's] LeftHand."

Dot Hill also plans to scale down the Cloverleaf technology to make it more available for its midsize and larger entry-level customers and partners, Mills said. "That's our 'Lite' strategy," he said. "We're working on it now. It will enable us to come into the channel more."

Dot Hill has traditionally focused on the OEM storage market, but last fall unveiled plans to shift its focus to working with solution providers.

Cloverleaf will help Dot Hill do more with the channel, which is where companies like Compellent and FalconStor generate most of their sales, said Dave Zimmer, vice president of worldwide channel sales and marketing for the vendor.

"We've already gotten feedback from our partners that they are interested in the kind of things Cloverleaf provides," Zimmer said. "This will be a valuable addition to our line, especially for our channel partners."

Dot Hill plans to pay $2.5 million in cash and $9.5 million in unregistered Dot Hill common stock for Cloverleaf.

More information on Dot Hill's acquisition of Cloverleaf can be found in the company's SEC filing by clicking here.

3PAR, in the meantime, is a prime acquisition candidate by companies such as HP or Dell, Barron's wrote. The company's estimated revenue for 2009 is about $195 million, and it carries minimal debt. Barron's estimated that suitors could make an initial offer of bout $1 billion, or about 50 percent over its current market capitalization, but wrote that the offer could go up even higher in case of a bidding war.

Both HP and Dell could benefit strongly from an acquisition of 3PAR, said Mark Teter, CTO of Advanced Systems Group, a Denver-based solution provider and one of a handful of 3PAR partners.

"3PAR offers a tier-one storage solution, one of the best in the industry," Teter said. "3PAR has been in the game long enough to where people know their technology and performance. It's a very credible company to bring in."

HP could be interested in 3PAR for several reasons, Teter said. The company's executive team includes several former HP people, and HP could use 3PAR as a way to replace arrays OEMed from Hitachi Data Systems for its high-end storage offering. HP could also use 3PAR as a tool to directly attach EMC's high-end storage business, Teter said.

For Dell, an acquisition of 3PAR would be a good opportunity for it to get into the enterprise storage business, he said.

Teter also said other companies that might look at 3PAR include Fujitsu or Siemens-Bull, two foreign storage vendors that could use 3PAR as a way to build its North American market.

Such an acquisition could also be good for 3PAR, which until now has had a definite direct sales focus but which needs to do more with the channel in order to extend its customer base, Teter said.

"The channel has been a challenge for 3PAR," he said. "If it doesn't get acquired, it will need to become more of a channel-friendly company."