History (1999): IBM Acquired Mylex for $240 Million

IBM will fork over roughly $240 million to acquire all of Mylex, which will become a wholly-owned subsidiary of Big Blue.

The deal should close on February 29, 2000, unless there are last-minute difficulties, which is unlikely.

IBM’s Technology Group, which also supervises IBM’s Storage Systems Division (SSD), hopes to strengthen its OEM market and will use Mylex’s technology for its own data storage offerings. The company anticipates that RAID adapters and external controllers will continue to be sold to distributors, VARs and system integrators, as well as to OEM customers.

For Mylex president and CEO Al Montross, “IBM will help to bring our line of RAID controllers to a broader customer base then ever before.”

The two firms have a long history together. Starting in 1993, Big Blue was a major client, but stopped buying in early 1996, deciding instead to manufacture its own RAID controller that does not seem to have enjoyed much success.

Discussion resumed at the start of this year, when IBM became interested in a new Mylex RAID controller code-named Meteor. Negotiations then commenced in May, primarily between Montross and Brian Truskowski, VP development, IBM SSD, at first for a possible participation, and finally for an out-and-out acquisition of the company that Dataquest and IDC ranked as number one supplier of RAID controllers in the non-captive network systems disk array market for 1998.

Montross allowed the price to climb, given that other companies were also interested in his firm. The final price is roughly double the projected revenues of the RAID maker for this year, for a company that has been racking up losses since March 1998.

Mylex, a pioneer in the field (since its first RAID dates back to 1992) saw its troubles begin in 1996, after several boom years. A disastrous 1997 followed, while 1998 was a slight improvement, although Mylex has still not regained its 1996 level ($173.1 million for the year), given that sales for 1999 should hit somewhere around $120 million. There was the termination of the IBM contract.

Meanwhile, DEC no longer accounts for the 23%t of Mylex’s sales posted in 1997.

The acquisition of BusLogic, a maker of SCSI adapters (an activity that never quite prospered for Mylex, and in fact, may have done more harm than good), for $50 million, was a strategic error. For the first six first months of this year, this activity represented only 3% of Mylex’s sales, compared to 97% for RAID controllers. For the last known quarter, ended in June, the 7% increase in sales is attributable to higher external RAID sales, in particular the DACSX and a custom external RAID product designed for HP. The DACSX and custom HP product sales reached $6.6 million and $4.3 million, respectively.

For the first 2 quarters of 1999, Siemens, a customer of long-standing, was Mylex’s largest customer, representing $9.2 million, or 13% of total net sales. The next three largest accounts were Fujitsu, NEC, both especially faithful to Mylex, and Compaq, which accounted for $8.0 million or 11%, $6.8 million or 10%, and $6.5 million or 9% of net sales, respectively.

Here again, one wonders whether IBM will hang on to these customers which are also competitors for its own activities.

In any case, Big Blue has gained a technology it was sorely lacking for the NT and Unix market.

In reality, the acquisition of Mylex was concluded through the intermediary of the S2 Acquisition Corp., a wholly-owned subsidiary of IBM.

Furthermore, the transaction provides for Montross to receive $200,000 next February 29, and again the following year, if he stays in the company.

Note: In 2002, LSI Logic acquired the IBM’s subsidiary Mylex for only $50 million.

This article is an abstract of news published on issue 140 on September 1999 from the former paper version of Computer Data Storage Newsletter.