EMC move fuels storage shakeout

A steadily consolidating storage market veered into the fast lane last week with EMC's US$1.3 billion purchase of Legato Systems Inc. And experts see nothing but open road ahead for more mergers and acquisitions.

The storage industry has witnessed about 125 deals since 2001, with 26 having been consummated this year. EMC has been on a spree over that span, having acquired 10 software companies - including Astrum, FilePool, Prisa and Terascape - as part of a strategy to boost software revenue from 23 percent to 30 percent of the company's total take. Meanwhile, more than 50 storage companies have declared bankruptcy or folded since 2001.

The bottom line for customers is that there are advantages and disadvantages in consolidation.

"Consolidation lets users buy integrated products from a single vendor rather than point products from a variety of vendors," says Anders Lofgren, senior analyst for Forrester Research Inc.

The downside is that customers might lose bargaining power.

"Even though customers will get better service and integration as consolidation happens, because there are fewer players, there is less price stability," says Brian Babineau, an analyst with Enterprise Storage Group Inc. "Customers lose their leverage in consolidated markets. Vendors can control pricing a little better."

Analysts say a variety of storage technologies remain targets for acquisition by EMC, Hewlett-Packard Co., IBM Corp. and Veritas Software Corp.

"The whole area of storage virtualization or abstraction, and along with that any number of storage management software vendors, are ripe for acquisition by the major systems vendors," says Ron Johnson, senior partner for the Evaluator Group.

As the products become more acceptable to end users, you are going to see the systems vendors like IBM and HP move into acquisition mode to make themselves more competitive," he adds. "(Virtualization start-ups) DataCore (Software Corp.) and Falconstor (Software Inc.), in particular, are ready for acquisition."

Ray Paquet, research director for Gartner Inc., points to another area that has gained attention recently thanks to heightened enforcement of government regulations.

"I would say the next set of acquisitions in storage would be in the archiving and life-cycle management products," Paquet says. "KVS, Educom TS, Outerbay, Princeton-Softek would be the likely companies (to be acquired)."

Legato was a player in this segment with its acquisition of OTG Software last year.

Backup is another area that might spur further consolidation, Babineau says.

"The next round of acquisitions comes around the back-up area because that's where there's still the most pain for customers," he says. "Companies like Revivio (Inc.) and Timespring (Software Inc.), which are building niche technologies that solve real business problems. Bocada (Inc.) and Avamar (Inc.) have great back-up strategies. They need to find channel relationships with large storage vendors before an acquisition will be considered."

EMC's explanation

EMC expects the Legato deal to fill gaps in its product line, build a software sales force and increase its share of revenue devoted to software. Long considered an acquisition target, Legato provides software that EMC has identified as being crucial to what it calls a well-rounded information life-cycle management software portfolio: backup and recovery, clustering, server-based replication, hierarchical storage management and "e-mail/content archiving software.

"I am 100 percent convinced that the next big thing in storage software is to manage the complete life cycle of data, from inception, to archive, to disposal, while assuring business continuity," said EMC CEO and President Joe Tucci in announcing the deal last Tuesday.

"The management of data creation, archiving and retrieval of data is increasingly important as organizations are forced by government regulations to retain data for longer periods of time," he said.

Not everyone sees the Legato deal as a big plus for EMC.

"EMC has not bought much in the way of technology - Legato's (back-up and recovery software) is a me-too technology," says Ashok Kumar, senior analyst with US Bancorp Piper Jaffray. "The bottom line is that Legato has 400-strong indirect channel partners that generate about three-quarters of their business. The question is whether EMC will be able to leverage that to sell their software products, because the problem they face right now is they don't have a channel for their software."

The acquisition of Legato will add one percentage point to EMC's present 23 percent software revenue, according to the company. To reach its 30 percent goal for software revenue by the end of 2004, the company says it must expand its sales channels and make another big acquisition.

Legato suffered financially in recent years as competitors such as Veritas ate into its back-up and recovery business. The combined companies will have 18,700 employees and $5.8 billion in revenue. Legato will be operated as a software division of EMC.

Start-ups for sale

Unlike the EMC-Legato melding of heavyweights, most storage-related acquisitions involve start-ups, which analysts say generally must be acquired either because they run out of money or they fail to sell products.

"They spend too much time focusing on technology and not enough on how to sell it," says Jamie Gruener, senior analyst with The Yankee Group. "These companies haven't developed a clear channel, customer confidence, partners that will service the products or OEM relationships - all the sorts of things that have to happen to be successful."

Most notable are the companies that have focused on the high-speed InfiniBand bus. While no analyst would call InfiniBand dead, few vendors remain in their original condition. Omegaband and Paceline have ceased operations. Essential Communications was acquired by SBS. And Vieo, Banderacom, IBM and Intel got out of the faltering InfiniBand business.

Among the InfiniBand companies that remain are Topspin Communications Inc., Infinicon Systems Inc. and Fabric Networks, which was formed by the merger of Lane 15 and InfiniSwitch.

Network-attached storage (NAS) vendors also have suffered at the hands of more powerful competitors such as EMC, Network Appliance Inc. and Microsoft Corp.'s Windows Powered NAS. Among the NAS vendors that no longer exist are Auspex, Ikadega, Scale8, Swarm Networks, TimesN Systems, Tricord Systems and Zambeel.

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