March 9, 2011 – Following Monday’s announcement of Western Digital’s plan to acquire Hitachi GST for $4.3 billion, consolidation in the storage industry continued today with NetApp’s surprise announcement that it will buy LSI’s Engenio business for $480 million in cash – the largest transaction in NetApp’s history. The deal is expected to close within 60 days.
NetApp officials expect the acquisition to add $750 million to its revenue stream in fiscal 2012, and to add $5 billion to its total addressable market (TAM) by 2014.
LSI’s Engenio division had revenues of $705 million in 2010. (LSI’s entire storage portfolio generated revenues of $954 million in 2010.)
The new unit will be run by Manish Goel, executive vice president of NetApp’s product operations.
It’s important to note that NetApp is buying only the Engenio product line (external disk arrays), not LSI’s other storage lines (e.g., the ONStor and MegaRAID and 3ware controller/adapter families).
In acquisitions such as this, it’s customary to examine product overlap between the two companies’ product lines. However, NetApp officials didn’t really address that during their conference call. Instead, they focused on new workloads (vertical markets) that the company can penetrate better with Engenio’s technology than with NetApp's FAS technology. NetApp officials cited video (including full-motion and surveillance) and high performance computing (HPC), as well as multimedia, oil and gas, semiconductor simulation, weather simulation, medical imaging, and content distribution.
In addition to those new fast-growth verticals, NetApp officials noted that the Engenio acquisition will significantly expand NetApp’s channel strategy.
Fine, but the interesting question is what will happen to Engenio’s OEMs partnerships. Engenio’s OEMs include IBM (Engenio’s largest customer, and already a NetApp partner), Oracle/Sun, Dell, SGI and Teradata.
In today’s conference call, NetApp CEO Tom Georgens (who was formerly with Engenio) subtly danced around this issue, and downplayed the OEM side of the deal. Here are some clips from Georgens:
“Clearly, we have to have dialogue [with Engenio’s OEMs ]. . . Our objective is not to undermine the OEM business; our objective is work hand-in-hand with them . . . [but] if things change and a relationship becomes less friendly, I think we have the tools to compete that the previous owner of this business did not.”
More clips: “We expect [the OEM business] to roll off a bit. It’s certainly not going to be a growth element. The growth will come from the new business . . . and expanded TAM . . . At the price we’re paying . . . and the potential return, I think we would have justified this transaction with no OEM business.”
And in response to a question about whether NetApp would be able to keep all of Engenio’s OEMs: “I think that we’ll keep a number of them, or a large portion of the OEMs, but I don’t think we’ll keep every dollar of OEM revenue . . . I’m not saying that OEMs don’t matter, but the growth is elsewhere [in the new vertical markets].”
I’d guess that the OEM relationships with Oracle/Sun and Dell will be on shaky ground, but if the storage opportunities in areas such as video and HPC grow as rapidly as expected, and NetApp can gain significant market share in those verticals with the Engenio technology, then the OEM side of this equation may not matter.
As for LSI: The company’s press release said that “The strategic decision to divest the external storage systems business was based on the company’s expectation that long-term shareholder value can be maximized by becoming a pure-play semiconductor company.” In conjunction with the acquisition announcement, LSI said that its board of directors has authorized a new stock repurchase program of up to $750 million.
posted by: Dave Simpson