Dell Just Bought N.H.’s Tech Sector

On Friday afternoon I was talking with Tony Asaro about the interesting phone call he'd been on for the previous hour or so. Michael Dell had given Tony a jingle to talk all things storage – and do a little fishing. Tony was impressed that Michael had such deep knowledge of the players, the products, and the market – which makes sense considering he was about to spend $1.4 Billion bucks on Equallogic. Plus, the guy is worth more than most countries, and you don't get that way without being in the know generally.

First, let me just say how glad I am for those crazy New Hampster folks. Before they even had a name for their venture, the three founders – Peter Hayden, Paula Long, and the CTO whose name I can never remember but he looked an awful lot like the Unabomber, came on in to ESG and told me their tale. New Hampshire people are not like Massachusetts nor Silicon Valley people. They didn't know all the answers yet. They were still learning. They were all former DEC engineers who felt they could re-invent the way storage worked – breaking the 20 year old "two controllers and disks in a box" principal that still dominates the industry. They were honest, nice, and naive. I liked them immediately, loved the story, and didn't think they had a chance in hell of pulling it off.

The big E is one of the very, very few companies that have crossed my threshold who seemingly hit every milestone they put on the table. I still have their original presentation, and it's shocking how consistent it still is. From engineering to business execution, every time they said they were going to do something, they did it. While most others "re-invented" themselves every quarter, the Live Free or Die (apparently nice and honest also comes with a gun) bunch stuck to their original plan – iSCSI super-scalable storage with dramatically better economics capable of being operated by monkey.

Equallogic is a great IT example of a Blue Ocean – they do things differently. The product is different but more importantly, the go to market strategy was different. The E team was perhaps the first storage player to figure out that VMware was the train to ride – and they mastered the play such that by the time others woke up E had huge momentum with the VMware channel, which has been a tremendous success.

Maybe the best part of the whole deal is that E doesn't have to go public. They don't have to ride the treadmill that never stops inside of a fish tank with Wall St. just waiting for a hiccup. No lock ups, no vesting most likely, and at $1.4B there is plenty of cash to go around. It will be interesting to see a bunch of bearded, flannel clad folks mounting gun racks to their new Maserati's.

$1.4 is nice high bar. All the other storage system plays either in registration to go public, or about to be, have to be almost as psyched as their investment bankers are.

I suspect you'll hear how EMC doesn't view this as competitive and that all is well with Dell. They both know the possibility – and probability – for competition is inevitable, but neither wants to screw up what has been a golden goose for both. Dell will say that they have always had non-EMC systems (the 3000i is not EMC, for example) and that is proof that it will work out. If Dell starts to get any market momentum at all with this stuff, the EMC sales force will shut down relations faster than Sarkozy did on his 60 Minutes interview. It doesn't matter what corporate says, the EMC sales force will violently protect their customer base. I can't get my brain around how this will play out without bloodshed eventually. Dell didn't spend $1.4B in cash to not go after the market.

I'm a tad surprised that something along these lines didn't happen earlier. Dell wanted EMC to give them this kind of product, but EMC chose not too. I can understand both sides – EMC wants to protect their core systems business and feels that providing high-function, low cost systems through a huge volume channel like Dell will only serve to drag down margins across the board. Dell, the high volume channel, wants lower cost, high function systems to attack the SMB market – which is still up for grabs. It was only a matter of time before Dell made a move. I don't know this, but am guessing that Dell Storage mucky muck Darren Thomas has his fingerprints all over this deal. Darren came back after beating cancer with a whole new zeal, and he's been effective at getting the other mucky mucks to start challenging themselves and start getting aggressive. It's hard to imagine a company that already sells billion of dollars of storage as not aggressive, but he is right – Dell rides in this space, they aren't making a market. The SMB space is wide open, so maybe this is a sign of how they are going to violently attack that opportunity. If successful, the financial implications for Dell go way beyond storage. Darren recognizes more than most that time is short, and being along for the ride isn't as satisfying as creating your own destiny. I hope they kick some ass.

EMC could have bought Equallogic years ago, for pennies on the dollar. While it is true that you can draw semi-clear lines of demarcation between the Equallogic market and the EMC markets, those lines get fuzzy eventually. We talked with a huge EMC shop who bought an Equallogic box just to "keep EMC honest". They had no intention of really using Equallogic for anything "real". They started with 2TB, and parked it front and center in the main window of the data center. Six months later they had over 100TB because "it really was amazingly easy to add-on to and anyone could manage it".

After all this time, who would have thought the storage industry would be interesting again?

Comments

[MarcFarley]

Hey Steve, thanks for the kind words. The "unabomber"'s name is Paul Koning. Very bright guy - still has the big beard - and is not a threat to anybody except other storage companies.

[Mike M]

Nice post. I think E will be a nice fit with Dell. E has reduced storage area networking to monkey level while maintaining the quality they strive for. EMC will suffer due to this. I have worked with EMC FC stuff in the past (FC's and CSX's). They fall way short on the software side. E makes a better product, hardware and software. I have worked with them many times in various virtualization environments and you can't beat them economically, ease of use or any other way.

-mwm
http://www.blatbox.com

[Pete Steege]

2T to 100TB by accident - that kind of sums up the insatiable demand for storage that's really only limited by manageability. It's less and less about the bytes and becoming all about how easy it is to use them.

[Anonymous]

This is great news for most employees at EqualLogic. Unfortunately, a select, undeserving few are going to walk away millionaires. While the founders and VC’s deserve every dollar, several “short-timers” will hit a windfall despite contributing little value to the success of EqualLogic.

-----Unfortunately that is true in all of these deals. There is always an imbalance of equity as that is used to lure top talent into the company - in theory to put the company into position to hit a home run - as clearly was done here. After reading the S1 however, there are so few major stockholding exec's that i'm not sure any could be categorized as "along for the ride". A VC? Sure but I have difficultly believing that $1.4B would have been attainable without the entire list of exec's, past and present. If anything, where the rank and file lose out in deals like this is that when the company wasn't worth much, the VC's negotiated huge ownership percentages - 85% in this case. If you want to direct anger or dissapointment at anyone, it should be there. If they (the VC's) only had a "piddly" 70% then there would have been 30% ($450M) that could have been doled out to employees. I'm not saying it's fair, or right, but it is what it is. ----Steve

[Tom]

> "C's negotiated huge ownership percentages -
> 85% in this case"

See article below: the VCs got such a big chunk
because they were seed investors from the start.
The other issue was probably raising money in a
crappy environment (post dot-bomb time period)
where terms favored "those poor" VCs.

Look at it this way: the founders got to borrow
"other people's money", risk it and make a ton
of money for themselves. I'm sure they're not
complaining and certainly, neither are the people
who loaned the money ("those poor" VCs).

http://interactive.wsj.com/public/current/articles/SB1002665657439874720.htm