EMC-DG deal rocks RAID market
Last month, EMC announced its intention to buy Data General, including both the Clariion and Aviion divisions, in a stock pooling deal valued at roughly $1 billion. The accord sent shivers through the RAID vendor community, but was generally regarded as good news for the IT buying community.
"For IT organizations, one of the challenges with Clariion is direct sales service and support," says Sean Derrington, an analyst with the Meta Group consulting firm, in Stamford, CT. "EMC acquiring Clariion solves that problem. IT can go directly to EMC, which is very positive."
"If EMC offers a platform that`s not locked into specific software, IT managers might be a little more open to EMC," says Glenn Hanus, an analyst with Needham & Company, an investment banking firm in New York.
But the acquisition, if it goes through, will have serious ramifications for practically all disk array vendors. The company that was expected to be hit hardest by the EMC-Clariion combo was StorageTek, one of Clariions`s largest OEMs and one of EMC`s main competitors. However, two days after the EMC-DG announcement, STK unveiled a wide-ranging OEM relationship with Sun Microsystems, claiming that the timing of the announcement was "coincidental."
Under the terms of the Sun-STK agreement, StorageTek will resell Sun`s next-generation disk arrays and Sun will resell STK`s next-generation tape libraries. Sun`s arrays are due in the first quarter of next year, and will support Unix and Windows NT.
Although significant for STK, which has been struggling recently and faces newborn competition from one-time partner IBM (see related story below), the STK-Sun marriage was eclipsed by the EMC-DG deal. The specter of EMC with a strong play in the mid-range market cast a long shadow over other vendors and resellers in that space.
In terms of impacting the storage industry`s competitive landscape, a number of long-time participants said that the EMC-DG deal was rivaled only by IBM`s 1996 decision to resell StorageTek`s "Iceberg" array technology and Compaq`s acquisition of Digital and its StorageWorks line.
EMC chief executive Mike Ruettgers expects the acquisition "to expand EMC`s target market by at least 40%," and said that DG`s revenue will be additive to EMC`s goal of achieving $10 billion in revenue by 2001 (from $3.9 billion in 1998).
Clariion is second only to EMC among independent disk array vendors, and the combined company would considerably increase the distance between EMC and second-tier independents.
[The EMC-DG deal] will certainly put more pressure on independent vendors and systems vendors [such as Compaq and Sun]," says Derrington. He adds that the competitive landscape will tighten even further with the Sun-STK partnership and HP`s OEM deal with Hitachi Data Systems (see InfoStor, August).
It should be noted that the EMC-DG deal is not expected to be completed until the end of the year, and could in fact not happen at all. Completion of the acquisition depends on regulatory approval, and it is possible that another suitor could emerge with a better offer--such as a cash-only proffer (although such a suitor would have to pay a breakup fee equal to about 5% of the deal`s value under the terms of the agreement). Possible candidates include vendors that were rumored to be in talks to acquire Clariion prior to the EMC announcement, including Dell (one of Clariion`s largest OEMs), Sun, Hewlett-Packard, and IBM.
If it does come to fruition, the acquisition could solve a number of problems that both companies were facing. In mid-May, Clariion announced a major shift from its OEM/reseller strategy toward a direct sales approach (see InfoStor, June, p. 1). However, most analysts considered that move a long-shot proposition due in part to the daunting expense of building a direct sales force. (The associated costs were estimated at more than $100 million.) In addition, Clariion had been plagued by marketing and distribution problems, and the loss of some key OEMs.
"Clariion saw their OEM business drying up so they had to go direct, but they had little visibility. They were behind the eight ball in direct sales," says Richard Lee, president of Data Storage Technologies, a consulting firm in Ridgewood, NJ.
Clariion officials paint the deal as an expedient way to grow their direct sales. "We`re committed to building up a very large end-user business," says Joel Schwartz, vice president and general manager at Clariion, "and the probability of success, and taking advantage of the window of opportunity, is much higher with EMC."
For its part, EMC was facing increased competition from IBM, HP, and Hitachi Data Systems at the high end, and vendors such as Dell in the mid-range market. In fact, EMC was regarded as lacking a mid-range strategy altogether.
Acquiring Clariion would give EMC a strong play in the mid-range market, particularly the Windows NT space, as well as technology and expertise in areas that it was perceived to be weak in, such as native Fibre Channel technology. In addition, it would provide EMC with a product line considerably less expensive on a per-MB basis than its Symmetrix arrays.
EMC could add software functionality to the Clariion architecture, although it`s unlikely that EMC will be able to port any of its Symmetrix-specific software to the Clariion architecture. However, some functionality--such as PowerPath software--could eventually wind up in the Clariion line. "In mid-to-late 2000, you`ll see some limited software capabilities ported over, such as PowerPath and multiplatform support," says Derrington.
Despite being hailed as a win-win for both companies, EMC faces a number of hurdles. For one, the two companies have very different cultures, particularly on the sales side. "It looks like a win-win deal for both companies, but I don`t see how EMC can absorb and integrate Clariion without a major upheaval," says Lee. "Culturally, the two companies might as well be from different planets."