FalconStor, NPI to merge

Posted on June 01, 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 has signed a definitive agreement with Fremont, CA-based switch manufacturer Network Peripherals Inc. (NPI) to combine the two companies in a reverse merger transaction.

The deal 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, 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's 150 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 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.

"I think XSAN makes NPI more attractive in terms of finding a buyer," says Lam. 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.

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. (For more information on IPStor software, see InfoStor, March 2001, p. 1.)

IPStor software is end-to-end IP-based storage networking and a full-blown virtualization engine, "and the merger demonstrates the power of virtualization," Duplessie says.

At last month's Network+Interop show, FalconStor 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; collaborated with QLogic to complete the industry's first any-to-any storage virtualization engine; and signed a long-term partnership agreement with Solution-Soft for its SafeCapacity automated capacity protection software.


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