The New York Post is (again) reporting that EMC will pull the trigger on Isilon. The deal was previously reported hovering at around $2B and word was that the two sides walked over price. Isilon ultimately was smart to hold out as it knew EMC coveted its technology base. Isilon is a best-in-class scale out NAS player that has perfected the art of providing simple scale out storage. Isilon relies on software, not hardware for data protection and has architected protection into its operating system. Isilon stripes data across its clustered nodes (wide striping) and essentially provides RAID-like function on its network (e.g. a distributed software RAID). The company has eliminated complex LUN management providing a single global namespace to clients and is a leader in its field.
Isilon’s stock has exploded on the strength of the rebounding economy and two other major factors: 1) it’s 70% annual growth rate and 60%+ 2 year growth rate and 2) M&A action in storage (i.e. the 3PAR deal). Rumors of an acquisition by EMC have been swirling for weeks as EMC has been looking for ways to continue its lead in the market as NetApp in particular has been growing faster than EMC in core storge markets overall. EMC is clearly sensitized to the NetApp threat and it has taken actions to block NetApp’s success – most notably by outbidding NetApp for Data Domain in 2009 and now going after NetApp’s crown jewels, its NAS business.
EMC’s midrange business has been struggling to compete with NetApp’s unified vision. EMC has promised unified function and while it has made some progress it has struggled to truly unify its myriad midrange offerings. A deal with Isilon will give EMC a new flagship in scale out NAS that will instantly push EMC to the top of the heap from a technical standpoint. Isilon is probably the best scale out NAS in the market that competes with the likes of BlueArc and DataDirect Networks. Isilon as a public company with more resources has greater momentum than these two private firms.
Is $2B too much? Assuming that’s the price – no. EMC has proven that “overpaying” for a growing asset works. EMC has tons of cash on the balance sheet and acquisitions don’t hit the income statement. So essentially, from a P&L standpoint the impact of such acquisitions is only positive. EMC will put more goodwill on the balance sheet and write off any assets that go south. No one will even notice on Wall Street. Meanwhile, EMC will pop Isililon into its sales channel and explode the business just like it is with Data Domain. Word is Data Domain is absolutely crushing it’s plan for 2010.
Bottom line: Good move for EMC. Isilon is an excellent product, EMC’s NAS products are nearing the end of the line and Isilon is the future of scale out where the growth is huge.
Check out this video of Isilon customers and partners at VMworld 2010:
Word is this deal is going down for $33/share which would put the acquisition at about $2.2B. What does all this mean to:
NetApp – once again EMC is using all its weapons to compete with the smaller NetApp. NetApp is growing faster, gaining more share* (in overall storage), has great momentum in the market and yet EMC just keeps changing the game in an effort to stay ahead of NetApp. VMware, VCE, Data Domain and now Isilon – EMC is pulling out all stops to compete.
*Note: According to IDC, in Q2 2010, EMC’s worldwide NAS revenues outgrew NetApp’s. EMC and NetApp accounted for about 70% of NAS revenue worldwide in Q2. IDC’s Q2 #’s were released in September of 2010 and showed EMC had about 20 points more share than NetApp in NAS. This is an astonishing lead and Isilon will likely add to it substantially. I have not dug into the IDC numbers so I really don’t know what’s in there but the figures are surprising nonetheless.
HP – Do you think EMC’s Rich Napolitano was paying attention when his former boss Dave Donatelli went out and bought Ibrix? You betcha.
IBM – What happened to SONAS – lots of fanfare earlier this year around what looked to be an interesting global clustered file system – not much happening in the marketplace.
BlueArc and DDN - The two main competitors to Isilon just got more interesting (and more valuable).
Customers – More EMC stovepipes but Isilon could be a unifying force. Those customers worried about doing business with smaller Isilon get a nice EMC blanket around them.
It’s official. The deal is going down for $2.3B. Here’s what Tucci said:
The unmistakable waves of cloud computing and ‘Big Data’ are upon us. Customers are looking for new ways to store, protect, secure and add intelligence to the vast amounts of information they will accumulate over the next decade. EMC, in combination with Isilon, sits at the intersection of these trends with leading products, solutions, and services to help customers get the absolute most out of what cloud computing has to offer.
Tucci’s message is pretty clear. He wants Cloud Computing + Big Data = EMC.
As I indicated before, this is actually a good use of cash. Share buybacks and dividends add no long term value to the business and R&D is risky. With Isilon, EMC is buying growth, it’s buying competitive position and it’s covering its butt on an aging midrange file business. While EMC can point to leading revenue shares in its file business the products were not viewed as simple to use and next generation. People will criticize EMC for writing checks instead of code but when you’re printing money the way EMC is, time-to-market is worth a lot.