Dell to buy storage company for $1.4 billion

EqualLogic develops storage area network (SAN) systems based on the iSCSI standard. The iSCSI standard is designed to operate on a company's existing Ethernet network, meaning businesses could lower costs by forgoing the need to install fiber networks.

"Our customers will be dealing with the largest increase in data we have seen in our history over the next few years," Michael Dell, CEO of the Round Rock, Texas-based company, said in a statement. "Leading the iSCSI revolution will help Dell accelerate IT simplification and virtualization."

Virtualization software allows users to run a number of operating systems simultaneously on the same computer.

Dell, which has slipped a notch in the PC market, has been increasingly turning its attention to storage.

The company plans to integrate EqualLogic's technology into future versions of its Dell PowerVault storage line, as well as retain the EqualLogic brand for current and future products.

In September, Dell introduced a new storage consolidation system designed for small and medium businesses. That SAN array was also based on the iSCSI standard.

EqualLogic is a relatively small player in the storage market, but ranks No. 3 in the relatively new arena of iSCSI IP, behind leader EMC and then Network Appliance, said Bill Choi, an analyst with Jefferies.

"Dell sells a lot to small and medium businesses, which find iSCSI easy to use with their Ethernet," Choi said. "When Dell announced its own MD3000i, that was their entry into iSCSI. They want to grow their business with this new technology and bought the leading pure play with EqualLogic."

IDC estimates the market will grow to $6 billion by 2011. EqualLogic, which in August filed with the Securities and Exchange Commission to go public, reported revenue of $90.9 million for the first nine months of 2007, more than double the $44.8 million generated during the same period a year ago.

That level of growth may bolster Dell's financial performance, given storage accounts for only 4 percent of its overall revenue, Choi said.

The deal is expected to close during the company's fiscal fourth quarter or early into its first quarter.

Shares of Dell were down 1.53 percent in morning trading, at $29.59 a share.

But taking a bigger hit were shares of storage giant EMC, which fell 4.24 percent to $23.51 a share in morning trading. EMC generates approximately 16 percent of its quarterly revenue from its relationship with Dell, which resells its SAN device to small- and medium-size businesses. The relationship has grown to the point where 35 percent of its Clarion product line is sold through Dell, Choi said.

With Dell's entry into the storage business last fall and given its bolstered presence with the EqualLogic deal, the computer maker may shift its emphasis toward selling its own storage offerings to new customers, than focusing on EMC's products, Choi said.

For EqualLogic, the deal marks the largest cash sale of a venture-backed company, said Christopher Baldwin, general partner of Charles River Ventures, lead investor of EqualLogic.

But he noted not to expect a wave of more start-ups and a feeding frenzy of similarly sized deals in this fairly new market.

"If you take a snapshot and put pen to paper, 18 months later you will see more of these companies emerging, but they would have missed the wave," Baldwin noted.

In the case of EqualLogic, Charles River provided the seed funding back in 2001 and, six years later, the company was gearing up Tuesday to do its road show to prospective IPO investors.

"The decision to sell to Dell was driven by the synergies," Baldwin said, adding, "It would be tough to slug it out with Dell (as a competitor). Dell is ferocious."