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HP deals to increase storage power

Hewlett-Packard is putting muscle into an effort to raise its profile in the data-storage market with new products, an acquisition, and new deals on the way.

Hewlett-Packard is putting muscle into an effort to raise its profile in the data-storage market with new products, an acquisition, and new deals on the way.

Yesterday, Hewlett-Packard announced it would acquire Transoft Networks, which makes software for higher-end storage area networks known as SANs. Tomorrow, the company is expected to announce a deal to sell Hitachi Data Systems' high-end storage products, according to sources familiar with the deal.

HP's moves come at a time when storage is an increasingly important part of the purchase of new computer infrastructure. "Storage is becoming a greater and greater portion of the storage-plus-server sale, as intelligence moves from the server to the storage side," said an industry source familiar with HP's storage push. HP has recognized the trend, and now "HP is playing catch-up."

The stock of high-end storage provider EMC tumbled on the news of the Hitachi deal today, because HP currently resells EMC storage hardware. But financial analysts as well as EMC believe the Hitachi deal will have a minor effect, because EMC does most of its business directly with customers.

"Our assumption is that HP will sell both Hitachi and EMC storage, but may favor the Hitachi product," wrote Merrill Lynch analyst Steve Milunovich in a report today. However, "At the end of the day, we think EMC's brand and storage-only focus will win out."

Also tomorrow, HP is likely to expand its current arrangement selling some StorageTek hardware as well, sources said. A spokesperson for HP declined to comment on the subject, saying the company won't speak until tomorrow, when it will "unveil a bold new direction in the storage market."

News of the Hitachi deal sent EMC stock down. But the company told analysts that it did not expect any deal between HP and Hitachi to affect either quarterly or yearly earnings. EMC stock closed today at 100, a 6.5 percent drop from yesterday's close of 107.

"We don't' think it's going to slow us down, whatever they do with Hitachi," said EMC spokesman Mark Fredrickson.

The contract between HP and EMC specified that in cases where companies needed storage capacity greater than 100GB, "HP would offer EMC's" products, Fredrickson said. The two companies renewed the contract for another three years in January.

The contract also included monetary penalties if EMC sold directly to HP accounts, said a source familiar with the contract. It's likely the contract won't have to be canceled, the source said, as it includes provisions for extraordinary circumstances--such as HP selling Hitachi storage equipment--that would lift the restrictions on EMC.

In the worst case, the Hitachi deal would mean EMC lost only 20 percent of its HP business, cutting its revenue growth rate by 4 percent, but "more likely, in our view, there will be no impact," Milunovich said. He added that HP sales contributed to 14 percent of EMC's first-quarter revenue.

The HP agreement at times has been "an inhibitor" to EMC, Fredrickson said, when the company has been ready to move faster than HP. In addition, the demise of the agreement with HP means EMC would be able to sell directly, avoiding the commission paid to the HP sales force.

About 80 percent of EMC's sales currently are directly to customers, Fredrickson said.

The HP deal will be good for Hitachi, even if, as expected, the equipment is "rebadged" with an HP logo, said a source familiar with the deal. "I don't think they have a brand name to lose. I think HP can only help them at this point," the source said. Hitachi is in the midst of a push to increase the profile of its storage products in North America.