FalconStor, NPI to Merge

Posted on May 09, 2001

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BY HEIDI BIGGAR

Former Cheyenne Software CEO ReiJane Huai is hoping lightning does strike twice. Having sold Cheyenne to Computer Associates in 1996 for $1.3 billion, Huai says he is now squarely focused on establishing his year-old start-up FalconStor as an emerging leader in the network storage software space--one of the fastest-growing segments of the $44 billion global storage market.

To that end, Melville, NY-based storage infrastructure vendor FalconStor earlier this week signed a definitive agreement with Fremont, CA-based network switch manufacturer Network Peripherals Inc. (NPI) to combine companies in a reverse merger transaction.

The deal, which company officials expect will be completed late next quarter, gives FalconStor a significant cash injection and public trading status. NPI, in return, gets a stake in the $14 billion network storage infrastructure market and a way out of the increasingly competitive switch business while protecting its shareholders. NPI reported a net loss of $12.3 million for the quarter ended March 31, 2001.

Industry analysts are describing the planned merger as a win-win situation. NPI clearly saw the value proposition of the proposed deal, explains Steve Duplessie, senior analyst at the Enterprise Storage Group consulting firm in Milford, MA. "[And] it was a cheap way for FalconStor to get cash and go public [without] having to mess with the financial markets for a while."

According to the terms of the agreement, year-old start-up FalconStor will become a subsidiary of NPI in a stock-for-stock transaction in which shares of NPI common stock will be issued to FalconStor shareholders. The resulting company will be called FalconStor Software, reflecting FalconStor's majority control of the combined business.

Explains Wayne Lam, FalconStor's vice president of marketing, "It is a reverse merger in that FalconStor ends up being in control with roughly two-thirds ownership." Lam says it has no plans at this point to absorb NPI?s150 full-time employees and that the new company will have essentially the same management team as FalconStor has now.

To help sell off its hardware business, NPI has hired financial advisor Lehman Brothers to evaluate its strategic opportunities. NPI hopes to close a deal within the next month or two--a possibility made likely by the company's recent XSAN product announcement, says Lam.

"Frankly, I think the XSAN makes NPI more attractive in terms of finding a buyer," he says. Co-developed with FalconStor, the IP-based XSAN switch enables users to leverage existing Ethernet infrastructures in both storage area network (SAN) and network-attached storage (NAS) environments. The switch has either six or 12 Ethernet ports, two SCSI ports, and two Fibre Channel ports. "Now, you can just turn it on and plug in your file server, [as well as your] RAID devices, etc."

The NPI switch is also the first product to integrate FalconStor's IPStor software. Announced in March, the software enables block- and file-level storage traffic over standard IP networks as well as a suite of enterprise-class services, including virtualization, mirroring, remote replication, and snapshot capabilities.

IPStor is end-to-end IP-based storage networking and a full-blown virtualization engine, explains Duplessie (see "FalconStor combines virtualization, IP Storage," InfoStor, March 2001, p. 1). "The merger demonstrates the power of virtualization," he says.

Along these lines, FalconStor earlier this week at Networld+Interop made several announcements. In particular, the company says its has extended its full suite of enterprise-class virtualization and management services to Fibre Channel SANs; has collaborated with QLogic to complete the industry's first any-to-any storage virtualization engine; and has signed a long-term partnership agreement with Solution-Soft for its SafeCapacity automated capacity protection software.


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