Yesterday, NetApp announced the acquisition of the Engenio storage division of LSI for $480 million. Engenio is mainly known as an OEM provider of storage systems with a broad partner list that includes IBM, Sun, Blue-Arc, Teradata, Panasas, RAID Inc., SGI and Huawei.
This move follows a busy year of storage acquisitions with HP, EMC and Dell each spending more than a billion dollars on buys in the space. $480 million represents the biggest acquisition ever for NetApp, more than they spent this past year on Bycast and Akorri, or previously on Onaro, Topio, Decru or Spinnaker.
Most of the money in storage acquisitions has gone to software that can be mated to industry standard (or nearly standard) hardware, but this deal goes in a different direction with LSI being a vendor known for meat and potatoes Fibre Channel storage hardware without a lot of frills. NetApp is largely a software company that sells OEM hardware running their DataONTap operating system, chock full of some of the most features and protocol options in the industry. Focusing on differentiated software has allowed NetApp to enjoy high margins and a consistent, unified family of products from entry level to enterprise class. So why would NetApp want to jump into the fairly commoditized storage hardware business?
NetApp says that the Engenio products will be a separate offering from DataOnTap aimed at opening new vertical markets they haven’t had success with; areas where bare bones LSI products have had more success such as video surveillance, video game rendering and other bandwidth intensive apps. These businesses generally want fast unfettered access to lots of disk on the cheap, without caring much about ease of use or willing to tolerate the performance overhead or cost of advanced features; a model that NetApp really can’t deliver with current products. So NetApp would be able to address a new market segment, but one that is largely price driven with ultra-thin margins. Hardly seems worth their while to break away from the unification and software value stories they’ve been telling for years.
The unspoken story here could be that NetApp is tired of not being able to control pricing and roadmap on core products and having to share margins with current OEM partners Xyratex and Dot Hill. Maybe vertically integrating from software-only into hardware could get them a bigger piece of the pie and more control of their destiny by building their own gear. Also, as NetApp continues to explore architecture options like V-Series, Cluster-Mode and Virtual Storage Architecture (VSA, aka DataONTap in a VM), more flexibility in selecting and packaging drive units for control by various DataOnTap software incarnations will come in handy. NetApp CEO Tom Georgens worked at LSI previously, so he probably knows what he’s getting into. What’s more, NetApp has piles of cash after multiple consecutive high growth quarters — a nearly $5 billion war chest. Finally, LSI’s revenue from storage systems is steadily above $200 million per quarter, which makes $480 million look attractive as a purchase price, although preserving that revenue is not guaranteed going from neutral LSI to competitive NetApp.
In terms of LSI’s existing partners, the most interesting to NetApp is likely to be Teradata, a relationship that could strengthen NetApp’s position in data warehouse and business intelligence, hot categories that have seen acquisitions from EMC of Greenplum and IBM of Netezza, as well as pressure from Oracle’s Exadata. The IBM OEM relationship could go either way — IBM sells a substantial quantity of LSI systems as their DS5000 line, probably LSI’s biggest partnership, and they also resell everything NetApp makes as their N-series. The deal could strengthen the IBM-NetApp relationship, but there’s an off-chance it could disrupt the negotiating balance and destabilize things. BlueArc and Panasas are competitors to NetApp, so they are unlikely to stick around and Oracle/Sun’s continued commitment to their 6000 series is unclear. The rest of the partners probably could go either way, but some could be good channel builders in new markets or geographies.
In the deal, NetApp left behind OnStor, NAS gateway software purchased by LSI in 2009, but kept the StoreAge virtualization and replication software bought by LSI in 2006 (which was previously resold by HP as their SVSP product but subsequently cancelled).