Analysis of Finalized Dell/Compellent Deal

The deal finally happen. Is $960 million a fair price? Which companies could bid? What are the consequences for EMC/Dell relationship and for the storage industry?

The facts
On December 9, Dell and Compellent announced they are engaged in advanced discussions regarding a possible business combination. They entered into an exclusive agreement to negotiate a merger in which Dell would acquire all of the outstanding common stock of Compellent at a price of $27.50 per share in cash. There can be no assurances that an agreement will be reached or that a transaction will be consummated. Dell and Compellent do not intend to comment further until an agreement is reached or discussions are terminated. The deal was confirmed definitively today at $27.75 per share in cash for each share for a total equity value of approximately $960 million, and aggregate purchase price of approximately $820 million, net of Compellent’s cash.

The deal finally happen
This first press release on December 9 was curious. When you are in advanced discussions, it means that the deal is not done. But at the same time, an official and precise price was announced – $27.50 per share. What was the problem? Finally Dell slightly increased today by 1% its offer from $27.50 to $27.75 per share. There is always the possibility that Compellent’ shareholders vote the deal down. But it’s very rare when the boards of two companies agree on the final terms of an acquisition.

Is $960 million a fair price?
There are many parameters to evaluate a company. Looking at revenues, EMC bought Data Domain eight times the amount of the company’s sales, EMC and HP acquired respectively Isilon and 3par twelve times the total of their revenues. For Dell here, its only six times. Looking at the most recent three biggest storage deals, it’s a bargain.

         
Comparison of most recent biggest storage deals
               
(Price, revenues and net in US$ millions)

 * Estimations for calendar year 2010    

The price also largely depends on the potential of the acquired company in term of technology and expected revenues. For the four deals above, the acquirers got remarkable companies. But the main parameter is the number of companies bidding. Remember that EMC was also in competition with NetApp for Data Domain, and HP with Dell for 3par. Here with Compellent, there was no other bidding firm.

The low price to be paid by Dell is largely explained by being alone to be interested by Compellent and it’s finally a cheap operation compared to 3par, a better choice but paid 2.7 times more by HP. $960 million is even 5% lower than Compellent’s market cap of $912 million last Friday because Wall Street was betting on a higher amount.

Which other storage giants
could be interested by Compellent?
Neither HP nor EMC which have to digest their respective recent high-priced acquisition. Furthermore, it would be a comical situation to see EMC outbidding against its main OEM. IBM has already made its choice, XIV. Remain NetApp and HDS but historically reluctant to spend money for acquisitions of hardware companies. We don’t see Oracle/Sun entering in the race.

What are the consequences for EMC/Dell relationship?
Since few years, it’s clear that Dell wants to be more independent from EMC and is tired to pay royalties to sell CLARiiON subsystems. The first sign was that it practically stopped to offer Symmetrix line, the second one the acquisition of EqualLogic, and the third one its intent to get 3par. Maybe Dell will continue to keep high-end CLARiiON at its catalog as Compellent’s products are more mid-range storage systems. But the result of the new Dell’s acquisition is the end of the long-time friendship with EMC – as it is also the case with Fujitsu. It appears that it’s very difficult to be an OEM of such a giant and sometimes arrogant company like EMC. Losing these two big OEMs will not change drastically the growth of EMC. The current customers of CLARiiON will have the following choices: progressively being handled by EMC or having problems to completely change their storage infrastructure.

The losers
Following Dell’s acquisition, there are two big losers, EMC and Pillar, one of the last storage firm on the market that has the portfolio to fill Dell’s missing offering. The other ones will be lot of Compellent’s employees, totaling 387 at the end of 2009 and around 490 now, that will be progressively fired, those in administration, marketing and sales, as well as some main executives. The only ones that Dell will keep are in R&D team, about 111 people.

Some of current subcontractors of Compellent will also lose a customer. They include VAD Avnet that provides customized system controllers, generally obtained from Supermicro Computer. It also relies on Xyratex for custom enclosures and HDDs supplied from Seagate. Export firm AMEX was acting solely as an international distributor. Third−party hardware maintenance firm DecisionOne was providing repair services to end users.

Dell with a larger offering
Now Dell has the ingredients to cover about all the open storage market: its own low-end line PowerVault, EqualLogic for iSCI SAN and Compellent for FC SAN. EqualLogic’s units are scalable up to 461TB (on PS6500X model), Compellent’s ones to 1PB and CLARiiON to 1.9PB (CX4 mode 960). The only real weakness is in NAS and high-end SAN. We are waiting to see how Dell Dell will positioned Compellent FC against EquaLogic iSCSI.

This new acquisition has other advantages for Dell. Compellent was growing rapidly, having 1,812 end users at the end of 2009, now close to 2,500 and now more than 200 customers with installations over 100TB and and several in the petabyte-plus range including FBI. CEO Soran last year said his goal was to make a company with $1 billion in annual revenue.

The firm relies largely on the channel with around 450 partners around the world and the top ten accounting for 52% of revenues. Dell’s worldwide position could largely extend Compellent’s base of customers on the globe. But we’ll see if the computer manufacturer will keep the Compellent’s business model integrating hardware and software in the same package.

Brief history
In 1995, Phil Soran, Larry Aszmann and John Guider created Eden Prairie, MN-based Xiotech and sold that company to Seagate in 2000 for $360 million. They founded Compellent in 2002 and got $53 million in funding before an IPO on October 2007 raising $85 million at a price of $13.50, a share jumping that first day by 70%, giving the company a market cap of $718 million. Xiotech and Compellent sued one another over allegations that Compellent had stolen Xiotech’s technology. The two companies settled in 2005 without disclosing terms.

Compellent yearly financial results
          
(in US$ millions,
     FY ending on December 31)

* Estimations