Dell to buy data storage network firm EqualLogic for $1.4 billion

Computer maker Dell announced on Monday 5 November that it would buy data storage network company EqualLogic for $1.4 billion. This is Dell's largest-ever acquisition. Company insiders say it positions Dell perfectly in the future technology for the storage industry.

Privately held EqualLogic is a maker of iSCSI internet-based technology to connect corporate data-storage networks. Dell expects the acquisition to reduce earnings per share excluding some items by a total of 2 cents to 5 cents for fiscal 2009 and 2010.

The purchase gives Dell - the world's second-largest personal computer maker after Hewlett-Packard - a bigger foothold in the fast-growing business of virtualisation, which allows a single computer to operate like multiple machines. Data storage accounts for about $2.4 billion of Dell's annual revenue of about $57 billion.

Based in Nashua, New Hampshire, EqualLogic is a partner of VMware, which is majority-owned by EMC, the world's largest data storage equipment maker. Dell resells EMC storage to business clients, and accounts for about 15 to 16 per cent of its revenues.

The iSCSI storage market is expected to grow to 25 per cent of disk storage systems sold to all enterprises by 2011. The transaction suggests that Dell is using its cash to buy unique intellectual property rather than buy back stock. That policy might not be too popular with shareholders.

However, Dell said last week it expected to resume share buybacks. The company had suspended buybacks for over a year pending an internal audit into accounting irregularities, which resulted in restatements that trimmed the company's reported net income by $92 million over a four-year period. The audit was completed in August.

The EqualLogic acquisition has been approved by the boards of both companies, but must be cleared by regulators. It is expected to close late in the fourth quarter of fiscal 2008 or early in the first quarter of fiscal 2009. In the last two years, Dell has made six acquisitions.

The Round Rock, Texas-based Dell said in August that it would buy privately held Zing Systems, which has developed technology that allows digital music players to download music without linking to a computer. Earlier, Dell bought consultant ACS (UK) Ltd to expand its technology consulting business in Britain.

VCs make a killing
Venture capital (VC) investors in EqualLogic will reap a more than 10-fold return from Dell's $1.4 billion purchase of the storage software maker. Its backers include Palo Alto, California-based Focus Ventures, Charles River Ventures of Waltham, Massachusetts, Boston's Sigma Partners and Toronto's Dominion Capital.

They invested $52 million in EqualLogic and were just taking it public when Dell swooped. The deal has "yielded a very healthy multiple" said a typically understated announcement by Sigma managing director Wade Woodson.

The sellers were more than pleased with the purchase price, but analysts saw no signs that Dell has overpaid. Unlike flighty Internet companies, EqualLogic operates in one of the fastest-growing segments of technology today and already has hundreds of customers around the world.

The company generated revenue of $90.9 million over the last three quarters, earning $1.2 million as its sales more than doubled from sales of $44.8 million in the previous year's quarter. Its gross margins average 65 per cent.