Dell To Pay $1.4B for EqualLogic
Personal computer maker Dell said Monday it has agreed to pay $1.4 billion
in cash for EqualLogic Inc., which makes data-storage network systems, in another
move to boost growth by looking outside its traditional PC business.
Data storage accounted for only 4 percent of Dell's revenue last year but is
growing much faster than PC sales.
In the first nine months of this year, EqualLogic had sales of $91 million
and lost $1.9 million, although it turned a profit in the July-September quarter,
according to regulatory filings.
Round Rock-based Dell Inc. said the deal is expected to close early next year
and would reduce earnings by 2 to 5 cents per share for fiscal 2009 and 2010.
The figure excludes the amortization of intangibles.
Chief Executive Michael Dell said acquiring EqualLogic bolstered his company's
lineup in the fastest-growing part of the storage industry. Dell, who returned
in January as CEO, said it was the company's sixth acquisition in two years.
EqualLogic's systems use proprietary software designed to simplify how businesses
store and manage data. The company says its target customers are medium-size
businesses that can't afford costlier storage area network systems.
Research firm IDC estimates spending on virtualization software and services
will exceed $15 billion worldwide by 2011, up from $6.5 billion last year.
Virtualization is intended to let companies manage large amounts of data with
less hardware. Dell acknowledged it could affect demand for his company's hardware.
"While you might find any given particular customer who has more revenue
or less revenue because of virtualization, we know these technologies are available
and so we embrace them," he said in an interview.
EqualLogic CEO Donald Bulens said virtualization would help hardware makers
by creating new demand for storage products.
Analysts said the deal means Dell will develop more of its own storage products,
putting it in competition with data-storage gear maker EMC Corp., which counts
Dell among its largest customers.
JP Morgan analyst Bill Shope said Dell would still rely on EMC for traditional
storage customers while using EqualLogic to sell to midsize businesses.
Dell shares fell 8 cents to $29.97 Monday, and EMC shares dropped $1.06, or
4.3 percent, to $23.49.
The deal was announced as EqualLogic prepared for an initial public offering.
EqualLogic filed for an IPO in August, and company executives planned to begin
an investor road show Tuesday. No date had been set for the stock sale.
Software virtualization company VMware Inc. went public in August in the largest
tech IPO since Google's three years earlier.
EqualLogic got seed funding from Charles River Ventures and eventually received
more than $50 million in backing from that and other venture firms.
Christopher Baldwin, a Charles River partner and EqualLogic board member, said
Monday's deal was the largest all-cash acquisition of a venture-backed startup.
Most purchases include at least some stock as currency.
Dell expressed interest on and off for several years before negotiations became
more serious in recent months, Baldwin said.
The starting point on negotiating a sale price was set by the recent IPOs of
two other tech companies with similar growth rates and gross profit margins,
Riverbed Technology and Data Domain, Baldwin said.
EqualLogic, based in Nashua, N.H., has more than 3,200 customers in 30 countries.
Other topics that Michael Dell touched on:
A bigger retail strategy. The company, which long depended on selling
desktop and notebook computers and other items directly to customers, will announce
new retail outlets over the next 18 months. It already sells computers at Wal-Mart
Stores Inc. and has struck deals with Staples Inc. and retailers in Japan, China
"Six months ago, I think we had zero stores where you could buy Dell product,
and now we have about 10,000 stores," he said. "Just stay tuned for
Sticking with XP. Dell was asked how long his company will build PCs
with the XP operating system instead of Microsoft Corp.'s newer Vista system,
which had mixed reviews.
"When customers tell us they don't want [XP] anymore," he answered.
"We can load many different flavors of Windows or other operating systems
for that matter."