NetApp and Quantum: Why an acquisition would be difficult

A couple of weeks ago, Robin Harris at Storagemojo blogged that he thought it would be a smart move for NetApp to acquire Quantum. I do not agree and think that a Quantum (QTM) and NetApp combination would create major competitive and business challenges and would not be successful in the long-term.

Competitive
By purchasing Data Domain, EMC indicated that they have had little confidence in Quantum technology. Remember, they could buy QTM for a fraction of what they paid for Data Domain. EMC’s vote of no confidence is particularly troubling since their engineering team probably knows more about QTM’s technology than anyone outside QTM. Additionally, EMC has real world experience selling the QTM solutions and understands the strengths and weaknesses. The fact that EMC is ditching QTM in favor of Data Domain is a strong negative signal and makes me wonder why NetApp would be more successful with QTM technology than EMC. EMC’s salesforce has sold hundreds of VTL and data protection solutions since 2004 while NetApp’s has had limited success with the NearStore VTL. Is it realistic to suggest that NetApp’s team will be more successful selling QTM’s solutions than EMC?

NetApp would also have a difficult time competing with EMC and their intimate knowledge of the QTM products. EMC could provide their sales teams with details of the QTM solution and its weaknesses. EMC’s field reps could use this to their advantage to attack the NetApp/QTM solutions. I believe that NetApp (or anyone else selling QTM products) would have a very difficult time overcoming the EMC competitive onslaught.

Tape business
The recent excitement about the Data Domain bidding war has shined a spotlight on Quantum because they are (were?) partnered with EMC for deduplication, and are at risk of being replaced. Given the excitement, you might wrongly think that deduplication represents the majority of QTM’s business. According to QTM’s 10K, they generated $809 million in total revenue in FY09 (ended March 2009) while revenues from “disk-based backup systems and software solutions” was just $88 million. This equates to 10.8% of revenue from DXi, software and EMC. However, the $88 million grew from $49 million in 2008 and Quantum says that the growth was “primarily due to the addition of OEM software license revenue from EMC.” If we assume that EMC was 50% of the growth and we back out the EMC contribution in 2009, we find that the DXi and software provided about 8.7% of revenue. This final number still includes software revenue and so DXi actually represents less.

The point of this analysis is that Quantum is a tape company that has a small business selling deduplication appliances. Tape technology provides good margins, but is a declining business for Quantum (25% decline 2009 vs 2008). If you are a disk company like NetApp, do you really want to be in the tape business? Do you want the burden of developing, supporting and selling tape solutions? Additionally, from a revenue standpoint, do you want to add a business that is declining by 25% annually? It is hard enough to meet earnings numbers with a growing business. Adding a shrinking tape business will not make it any easier. (Of course, NetApp could sell the tape business, but that becomes complex and costly.)

In summary, NetApp may want to add deduplication technology. If they decided to take the M&A path, a purchase of Quantum seems unlikely. On the surface QTM may have interesting technology, but an acquisition can create more challenges than it solves.

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5 Responses to “NetApp and Quantum: Why an acquisition would be difficult”

  1. My name is Robin Harris.

    And I disagree with the analysis here. EMC bought a successful brand. The tech is less than half the value of DD. And they aren’t dropping QTM anytime soon. They can’t – they sold too many.

    QTM doesn’t have the product range DD does today, but they are working on it. What they don’t have is the DD brand. Quick, what does Quantum do? Uh, disks, no tapes, no tape libraries oh yes de-dupe. Nobody knows. Or cares.

    But for $500 million they could change that – for a lot less than EMC spent on DD.

    Robin

  2. Here’s a thought. NetApp has a dedupe VTL. Yes it’s missing features. No, it’s not selling a lot (in comparison to DDUP).

    BUT…

    How good could it be if they took a fraction of the $1.5B they were going to spend on DDUP and give it to the development team? Take another fraction and hire a bunch of exiting Data Domain reps. (The day the first EMC/DDUP announcement hit, a bunch of resumes hit the streets.)

    Just a thought.

  3. Hi and thank you both for your comments.

    Robin:
    I respectfully disagree. I think that EMC was having major issues with QTM technology and a key driver of the acquisition was technology. I believe that the EMC/QTM relationship is essentially over. I understand that they will have to support existing systems through end-of-life, but they are effectively done selling new QTM systems. If you are an EMC sales rep and you know that DDUP was just acquired and you have to choose between selling a QTM or DDUP system which do you sell? It is a no-brainer, DDUP is the only choice. Heck, I have even heard of current deals that have been delayed and/or canceled because customers do not want to invest in the now obsoleted QTM-based solutions.

    The statement that “Nobody knows. Or cares” about what Quantum does is true for an end user. However, I believe that it is completely relevant for any acquirer. If I am considering purchasing QTM, I care very much about the fine details of their business. I will value the company based off of its pieces, and need to understand how each segment is performing and the future prospects. I believe that the tape portion of the business will have a negative impact on the valuation since most disk companies will not want to run a physical tape business.

    In summary, I agree that the QTM’s brand is weaker than DDUP; however, I believe that there are technology issues as well. In my opinion, simply acquiring QTM for $500 million and throwing the NetApp brand on it will not solve the problem.

    Curtis:
    Your point is a good one. NetApp could clearly improve their VTL if they invested more money. However, I question their commitment given their history of limited investment. The DDUP offer seemed like a further acknowledgement that they are looking elsewhere for VTL/Dedupe.

  4. IMHO Quantum is a great target for Netapp, but I doubt they will bite as Quantum is packing debt and the EMC cash injection they got likely had all kinds of hideous terms for Quantum to navigate before entering a deal even if suggested. The performance and value of the VTL devices is not the issue at hand and the price EMC paid shows that. EMC did this to keep Netapp from getting good brand with lots of buzz. I would guess the last thing EMC wanted was Netapp getting face time with DD’s installed base and selling more primary storage FAS units. Quantum also has a great customer list plugged full of tape maintenance contracts, and lowering your backup requirements via FAS is great talking point to lead with. My guess is this is about protecting home turf and not making megabucks on Dedupe. If the average sale was 600K (and it’s not) they still need to do it over 4000 times (and they won’t). They will keep selling avamar, and Networker, and Quantum/Adic tape, and Falcon Store, and Quantum DXi, now datadomain….. because they have too.

  5. Bert,

    Thank you for your comment. You and I disagree on this point, and I appreciate your perspective.

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