NetApp Acquires LSI's Enginio External Storage Business

NetApp on Wednesday said it has reached a deal with LSI to acquire its Engenio external storage systems business for $480 million in cash.

NetApp said Engenio will bring high-performance, large-bandwidth capability to rapidly-expanding market segments including scientific research, genomics sequencing, and full-motion video capture and digital video surveillance. "When there's a problem and no vendor has a solution, that means there's an opportunity," NetApp President and Chief Executive Officer, Tom Georgens, said in a conference call on Wednesday. "The opportunity for us to immediately exploit is around video."

NetApp intends to complement its storage business for virtualized IT infrastructures with Engenio, which it will incorporate as a NetApp business unit rather than a stand-alone entity. "Engenio is an organization that's been around a long time," Tom Georgens said. "A lot of innovations in storage were actually invented by this group. It's a mature team, that's proven the ability to develop high-performance products, and we're glad to bring them into the NetApp family."

NetApp said it will combine its sales team with Engenio's, and that Engenio's team has proven its ability to manage an OEM business model. The unit will be responsible for product development under Manish Goel, executive vice president of NetApp Product Operations.

NetApp also said its current channel reach and variety of customers require additional bandwidth capability, and that Engenio will further diversify its distribution and reseller channels, in the server-attached and embedded storage segments in particular. "We're pursuing a channel diversification strategy to further reach into a set of customers we could not get another way," he said. "Any asset we acquire has to be relevant, it has to generate revenue for our core business, and open up new markets."

Engenio's storage platform will allow NetApp to take advantage of a $5 billion incremental market opportunity over the next three years.

Georgens said NetApp's number one criterion for acquisitions is affinity, that the additional technology is similar to NetApp's existing portfolio. "We're not acquiring it to get a holding company for our portfolio," he said. "If we acquire, an asset has to have something to do with our business, it has to be something our partners can sell. We see opportunities for this class of products from our existing channels every day. There's plenty of opportunity out there to generate returns on this product."

Despite the similar portfolio, NetApp's other acquisition criteria, according to Georgens, is that there be minimal overlap with the R&D of the acquired business minimal overlap. "One of the things that has allowed NetApp to out-innovate the market is that the majority of our R&D investment is on a single architecture," he said. "We develop it once and it's available to all workloads. However, there are workloads we're not going to service. In an acquisition we look for workloads that aren't going to overlap with what we're doing in order to meaningfully creating opportunity without duplicating functionality."

Next: NetApp's OEM Strategy

Despite incorporating LSI's former external storage business into its core operations, NetApp is keeping its platforms separate in order to avoid said overlap. "This is not intended to be our SAN product," Georgens said. "We have one, it's called FAS (Fabric-Attached Storage)."

Georgens said the other strategic rationale for the acquisition has to do with NetApp's channel relationships. "We're pursuing a channel diversification strategy to further reach into a set of customers we could not get another way," he said. "Any asset we acquire has to be relevant, it has to generate revenue for our core business, and open up new markets."

NetApp has expanded its OEM business over the last couple of years, according to Georgens, and the company now has access to Enginio's OEM contracts. "Over the last several years, diversification has been a big part of our focus, it's a misunderstood part of the NetApp growth story," Georgens said. "Engenio offers the opportunity to add more OEMs to our portfolio, reach even deeper into our current OEM partners' offerings, and reach customers we couldn't reach on our own."

Georgens added that OEM channel will be the primary business through which server-attached products in NetApp's portfolio come to market.

Georgens said Engenio brings specific software functionality and a product that's optimized for price-performance, with a streamlined code base and OS, and a specific skill-set around bandwidth. However, "I think what they bring is a set of bandwidth products for traditional business applications," he said. "Price performance is not an issue for us. We added Enginio for applications that push the bandwidth especially hard. We're not going to pull data in that direction at the expense of our core business."

Georgens said NetApp is pursuing a relatively new market opportunity with this acquisition. "I'd say maybe two years ago or three years ago the market opportunity to do that may not have been so compelling," he said. "But what we're seeing in multimedia, with clients requiring thousands of terabytes per hour, shows that there's a need for a separate platform for these workloads." Georgens said the acquisition closed quickly, and though he didn't want to give to many details about the process, Georgens said NetApp over the last year saw lots of opportunity for this class of product. "The teams worked exceptionally hard and exceptionally long and frankly with the appropriate degree of silence to get us to this point in a relatively short period of time."

Georgens also said that despite both NetApp and LSI being partners with IBM, the two companies had not discussed an acquisition in the past. "LSI is a supplier of ours," he said. "But mostly, in terms of our storage business and there storage business, we've been fellow travelers."

NetApp said it expects the transaction to be accretive to its GAAP and non-GAAP earnings per share by the end of the second quarter of its 2012 fiscal year. NetApp estimates that its acquisition of Engenio will be completed in about sixty days, around the middle of May, according to Georgens.