If Dell buys Compellent, it loses EMC partnership

Dell will have a difficult time integrating Compellent's technology into its portfolio

After losing a drawn-out bidding war to Hewlett-Packard to acquire storage vendor 3Par earlier this year, Dell re-opened its coffers in a bid to acquire Compellent Technologies, hoping the company will be the answer to its midrange storage area network (SAN) needs.

Dell's attempt to snatch up 3Par put a strain on its reseller relationship with EMC, and its bid to buy Compellent certainly will represent the death knell.

Dell on Thursday announced that is in advanced talks with Compellent to acquire the company. It initially offered a price of $27.50 per share, or roughly $876 million.

Although there are more than two years left on the reseller contract between Dell and EMC, which was originally signed in 2001, it's unlikely Dell's sales force will pitch EMC's gear with any zeal if it purchases Compellent.

The reseller partnership represented billions of dollars in sales for the two companies. Last year alone, EMC garnered from eight per cent to nine per cent of its revenue from its relationship with Dell. For Dell, the partnership equated to 50 per cent of its storage revenue last year -- about 90 per cent of it coming from the resale of EMC's midrange Clariion line and 10 per cent from the high-end Symmetrix systems. If Dell acquires Compellent, it will be in direct competition with the EMC Clariion line that it resells.

The proposed Dell/Compellent deal also represents the sale of one of the last independent SAN vendors available to be purchased by a major data center player. The only remaining SAN vendors are Xiotech, Data Direct, Pillar Data, and Nexsan. But none of these companies compares with Compellent's market reach.

"They're a shining star," said Arun Tenaja, founder and consulting analyst at The Tenaja Group. "They've got an architecture conceptually similar to 3Par's. Anything I would ascribe to 3Par, I'd ascribe to Compellent."

Compellent differs from 3Par in that the latter sold to a higher-end marketplace. 3Par's SANs have an application-specific integrated circuit (ASIC) that offloads advanced functions, giving its systems higher performance. Up to eight 3Par SANs can also be clustered together to offer petabytes of capacity. Compellent's software only allows up to two SANs to be clustered together.

Most industry observers agree it's unlikely Dell will face a bidding war against other competitors for Compellent. EMC, NetApp, Hewlett-Packard, IBM, Oracle and Hitachi Data Systems already have their own flavor of midrange block storage technology. There is, of course, the chance that one of the latter vendors, could bid for Compellent in a defensive move just to keep it out of Dell's hands. Cisco Systems is also a distant contender for Compellent, as it already sells its own lower-end storage systems.

"It wouldn't be a bidding war, it would be a pissing war, which is not impossible. At the current price and with the money these people have been throwing around lately, a billion dollars to make it awkward for Dell is neither here nor there. But, they don't stand to gain much," said Mark Peters, an analyst with market research firm Enterprise Strategy Group.

The most likely of the larger players to enter the fray, Peters said, would be NetApp - not because it needs Compellent's technology, but because a deal would further extend its share of the storage market.

Compellent sells SANs and the software to manage them. Most notably, the company offers software that automates the movement of data between tiers of storage. For example, Compellent's Fluid Data technology allows IT administrators set policies that place the highest priority data, such as in relational databases, on high-performance and expensive solid state drives, while placing less timely data, such as e-mail traffic, on high capacity, less expensive serial ATA (SATA) drives.

Compellent's technology also offers thin provisioning, a means by which administrators can increase the utilization rates of their storage by allocating only what is needed by servers applications instead of the more common practice of overprovisioning capacity.

Compellent also announced last month the latest version of its SAN technology, Storage Center 5.4, which incorporates several hardware upgrades as well as adding storage virtualization to its bag of software tools. The new virtualization software allows two Compellent SANs to be seen as a single pool of storage by application servers, as well as to migrate data seamlessly between them.

Compellent is debt-free public company and sells its products exclusively through a channel sales network in 35 countries. The company said its SANs are installed at 3,000 customer sites.

If Dell acquires Compellent, it faces an uphill battle to integrate the technology into its current product line. In 2007, Dell purchased EqualLogic, an iSCSI SAN vendor whose products are aimed at the same midrange market as Compellent's products. Last month, Dell reported its sales of midrange iSCSI SANs from its EqualLogic line were up 66 per cent year over year.

"Although [Compellent] has recently expanded from SAN into NAS with the help of open-source software, its architecture remains limited to general-purpose environments," Paul Mansky, managing director of equity research for Canaccord Financial. "Scalability challenges inherent to the architecture have historically precluded Compellent from engaging in an enterprise environment."

In all likelihood, Dell would not cannibalize its own midrange sales and it would instead need to take some of the $1.6 billion it saved by not purchasing 3Par and invest it in beefing up Compellent's products for higher-end customers.

"It's a five-year plan either way," Taneja said.

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Tags IT industryDellstorageemcHewlett-Packardnetwork-attached storage3PARNetworked StorageCompellent Technologies

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Lucas Mearian

Computerworld (US)
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