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The Data Storage Gold Rush - Who's Left?
The mad scramble going on today in the data storage market may not be the sort of gold rush that gives us classics like "The Treasure of the Sierra Madre," but it is a gold rush all the same. Shareholders have seen soaring valuations, companies have seen the competitive chess board morph in front of their eyes and outside observers have had plenty to talk about as bids and rumors roil the markets.
IN PICTURES: 5 Tips To Reading The Balance Sheet
With the recent announcement of a deal between Dell (Nasdaq:DELL) and Compellent (NYSE:CML), it is fair to wonder whether the land grab is close to running its course. There is no doubt that storage is going to be a key component of corporate IT as long as there is IT, but it looks like a combination of scarcity and a need to digest prior deals may eventually calm the market.
The Big Boys
There is no question that there are plenty of options when it comes to corporate-level data storage. EMC (NYSE:EMC) is still a major player in the field, along with competitors like NetApp (Nasdaq:NTAP), IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Dell and Hitachi (NYSE:HIT). Within this wide array of vendors is an equally wide array of approaches and technologies, ranging from EMC's efforts to meet almost any conceivable storage need to NetApp's much more focused approach.
Perhaps one of the ironies of this spurt of M&A activity is that it does not immediately look like there are going to be seismic shifts in the industry. Acquisitions made by Dell and HP will help those respective businesses, but will not unseat EMC. The companies that have a more credible shot of taking a big swing at EMC have not been as active in this gold rush.
Who Is Left?
In relatively short order, three well-known small players in this space received and accepted buyout bids (3Par, Compellent, Isilon). What other companies could find themselves attracting some attention?
CommVault (Nasdaq:CVLT) would be a pretty obvious company to put into play, especially given that Dell is responsible for about 25% of its revenue and Dell could arguably stand to bulk up the software side of its storage business a little more. By the same token, Dell's acquisition of Ocarina may be enough in the company's eyes, and CommVault's products may be a more complicated sell than Dell really wants. On the other hand, NetApp or Oracle (Nasdaq:ORCL) may find that CommVault suits them just fine.
Thin Pickings in the Data Storage Sector
In terms of publicly-traded options, there is not much else in the field. A company like CA (NYSE:CA) would be more likely to want to expand than sell its storage interests, and the same would be true for Hewlett-Packard in the wake of its 3Par acquisition. In terms of other larger companies, Symantec (Nasdaq:SYMC) could perhaps break itself up (separating the security from the storage ops, for instance), but would that really create the sort of value EMC saw when it spun off VMWare? Likewise, Seagate (NYSE:STX) could theoretically look to sell or spin off its i365 business, but would most likely want to keep that and continue to build it.
What that means, then, is that acquisitions could increasingly turn to the private market. Companies like Aptare, Atempo and Syncsort could all make sense as targets for their software technology, while XIOtech could be desirable to a company that feels its needs more hardware. By the same token, it stands to reason that these private companies would also be getting phone calls and visits from investment bankers - with valuations in the sector running hot and investors poorer for choices, this could be a lucrative window of opportunity for an IPO or two.
Hot Markets Don't Last Forever
It would be remiss to leave the impression that it is just data storage that is hot right now. In fact, many aspects of the IT world are getting a lot of attention, including the very popular and very buzzworthy cloud computing space. That in turn has served to push up the valuations almost across the board on small and mid-cap tech companies, but particularly those with above-average growth and the perception of leading-edge technology. In times like these, value and growth investors usually take separate paths - growth investors will continue to hunt down the hot small companies, while value investors may want to consider the larger, more established players that have been left behind in the rush to growth. (For more, see Xyratex An Interesting Data Storage Play.)
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IN PICTURES: 5 Tips To Reading The Balance Sheet
With the recent announcement of a deal between Dell (Nasdaq:DELL) and Compellent (NYSE:CML), it is fair to wonder whether the land grab is close to running its course. There is no doubt that storage is going to be a key component of corporate IT as long as there is IT, but it looks like a combination of scarcity and a need to digest prior deals may eventually calm the market.
The Big Boys
There is no question that there are plenty of options when it comes to corporate-level data storage. EMC (NYSE:EMC) is still a major player in the field, along with competitors like NetApp (Nasdaq:NTAP), IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Dell and Hitachi (NYSE:HIT). Within this wide array of vendors is an equally wide array of approaches and technologies, ranging from EMC's efforts to meet almost any conceivable storage need to NetApp's much more focused approach.
Perhaps one of the ironies of this spurt of M&A activity is that it does not immediately look like there are going to be seismic shifts in the industry. Acquisitions made by Dell and HP will help those respective businesses, but will not unseat EMC. The companies that have a more credible shot of taking a big swing at EMC have not been as active in this gold rush.
Who Is Left?
In relatively short order, three well-known small players in this space received and accepted buyout bids (3Par, Compellent, Isilon). What other companies could find themselves attracting some attention?
CommVault (Nasdaq:CVLT) would be a pretty obvious company to put into play, especially given that Dell is responsible for about 25% of its revenue and Dell could arguably stand to bulk up the software side of its storage business a little more. By the same token, Dell's acquisition of Ocarina may be enough in the company's eyes, and CommVault's products may be a more complicated sell than Dell really wants. On the other hand, NetApp or Oracle (Nasdaq:ORCL) may find that CommVault suits them just fine.
Thin Pickings in the Data Storage Sector
In terms of publicly-traded options, there is not much else in the field. A company like CA (NYSE:CA) would be more likely to want to expand than sell its storage interests, and the same would be true for Hewlett-Packard in the wake of its 3Par acquisition. In terms of other larger companies, Symantec (Nasdaq:SYMC) could perhaps break itself up (separating the security from the storage ops, for instance), but would that really create the sort of value EMC saw when it spun off VMWare? Likewise, Seagate (NYSE:STX) could theoretically look to sell or spin off its i365 business, but would most likely want to keep that and continue to build it.
What that means, then, is that acquisitions could increasingly turn to the private market. Companies like Aptare, Atempo and Syncsort could all make sense as targets for their software technology, while XIOtech could be desirable to a company that feels its needs more hardware. By the same token, it stands to reason that these private companies would also be getting phone calls and visits from investment bankers - with valuations in the sector running hot and investors poorer for choices, this could be a lucrative window of opportunity for an IPO or two.
Hot Markets Don't Last Forever
It would be remiss to leave the impression that it is just data storage that is hot right now. In fact, many aspects of the IT world are getting a lot of attention, including the very popular and very buzzworthy cloud computing space. That in turn has served to push up the valuations almost across the board on small and mid-cap tech companies, but particularly those with above-average growth and the perception of leading-edge technology. In times like these, value and growth investors usually take separate paths - growth investors will continue to hunt down the hot small companies, while value investors may want to consider the larger, more established players that have been left behind in the rush to growth. (For more, see Xyratex An Interesting Data Storage Play.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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