Bloomberg News

NetApp Taking on EMC Puts CommVault in Takeover Sights: Real M&A

December 06, 2011

Nov. 28 (Bloomberg) -- NetApp Inc.’s need for acquisitions to help regain $7 billion in lost market value and keep up with data-storage rival EMC Corp. may put CommVault Systems Inc. and Quantum Corp. in its sights.

NetApp, which sells hardware and software to more efficiently store and access data, had slumped 38 percent in 2011 through last week, almost five times more than the Standard & Poor’s 500 Index, as sales fell short of analysts’ estimates, according to data compiled by Bloomberg. With cash at the Sunnyvale, California-based company reaching a record this year, NetApp should now use its $4.64 billion for takeovers as revenue growth slows, said ISI Group.

After NetApp boosted sales more than any other data-storage vendor in 2010, the $12.6 billion company has seen expansion slow as European customers grapple with a sovereign debt crisis and EMC, the world’s biggest maker of storage computers, claims more market share. With EMC spending 12 times more on acquisitions in the past decade, NetApp should acquire a data manager such as CommVault, according to Robert W. Baird & Co., or Quantum, said ISI, to expand its product and add customers.

“The environment for what they do has gotten more competitive,” Bill Choi, a New York-based analyst at Janney Montgomery Scott LLC, said in a phone interview. “They’ve been extremely successful but have gotten to a point where they need to have a more complete solution set if they’re going to get more customers. They need to keep doing some strategic M&A.”

Flooding in Thailand

Lindsey Smith, an outside spokeswoman for NetApp, declined to comment on potential acquisitions. Bob Wientzen, a spokesman for San Jose, California-based Quantum, and Dani Kenison, a spokeswoman for Oceanport, New Jersey-based CommVault, declined to comment on the possibility of an acquisition by NetApp.

CommVault climbed 8.4 percent to $47.49 at 4 p.m. in New York, its largest gain since August 2010. Quantum rose 14 percent to $2.55, the most in seven months, for the fourth- biggest increase in the Russell 2000 Technology Index. NetApp added 4.3 percent to $35.72.

NetApp had fallen 38 percent this year through Nov. 25, compared with a 7.9 percent decline for the S&P 500, as the company’s sales results and forecasts missed analysts’ estimates. Purchases by large corporate customers and governments were less than NetApp’s sales force projected as Europe’s sovereign debt crisis threatened to push the global economy back into a recession.

Cautious Spenders

The company is also facing a potential shortfall in computer hard-disk drives because of flooding in Thailand. While NetApp said it has bought enough inventory in advance to last through the end of December, Chief Financial Officer Steven Gomo said on a conference call this month that it’s “difficult for anyone to predict the business impact beyond that.”

“Right now there’s a macro-level concern,” given that about 25 percent of NetApp’s revenue is generated in Europe, Eric Martinuzzi, a Minneapolis-based analyst at Craig-Hallum Capital Group LLC, said in a phone interview. “The bigger issue is more about macro demand and a lack of hard-disk drive supply. People are getting more cautious about spending.”

NetApp’s data-storage revenue climbed 34 percent to almost $4.9 billion in 2010, outstripping the growth of its five largest competitors, according to a Nov. 21 research note by Shebly Seyrafi, a New York-based analyst at FBN Securities Inc.

In the last two quarters, NetApp’s growth slowed to 12 percent and 6 percent, less than the rates of its rivals EMC of Hopkinton, Massachusetts, and Tokyo-based Hitachi Ltd., the data show. Last quarter EMC and Hitachi increased data-storage sales by 16 percent and 25 percent, respectively.

‘Aggressive Competitor’

“The pressure on the stock is people questioning whether or not there’s been a change in the competitive positioning of the company,” Aaron Rakers, a St. Louis-based analyst at Stifel Nicolaus & Co., said in a phone interview.

EMC commanded 28.7 percent of global disk-storage-system revenue in the second quarter, up 3.1 percentage points from the same period a year ago, according to Framingham, Massachusetts- based researcher IDC. NetApp’s market share increased only 1.4 percentage points to 12.8 percent, IDC’s data show.

“EMC is an aggressive competitor,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a phone interview. “It appears that they may have taken some market share from NetApp.”

NetApp’s cash and short-term investments climbed to a record $5.17 billion in the quarter ended April 29. The company still had $4.64 billion in cash and only $1.39 billion in debt as of its fiscal second quarter, which ended Oct. 28.

‘Bigger Deal’

“They certainly have a rich balance sheet to go out and implement some strategic M&A,” Brian Marshall, a San Francisco- based analyst at ISI, said in a phone interview. “NetApp would be able to garner additional growth on top of their already stellar growth with aggressive M&A.”

NetApp should look outside traditional storage companies and more at data-management providers for acquisition opportunities, Jayson Noland, a San Francisco-based analyst at Robert W. Baird, said in a phone interview. CommVault, which specializes in backup and recovery software that makes it cheaper and easier to handle data, may be a good fit, he said.

“Data management is becoming a bigger and bigger deal,” Noland said. “That’s an area of the market that I could see NetApp pursuing.”

Fueled in part by takeover speculation, CommVault had risen 53 percent this year, giving it a market value of $1.9 billion as of Nov. 25. The shares reached a record high of $49.90 on Nov. 15.

Acquiring Quantum

Acquiring Quantum, which handles backup, deduplication, recovery and archiving of data, would also make “tremendous sense” for NetApp, said ISI’s Marshall. NetApp is already a reseller of Quantum’s StorNext file system and storage manager.

Quantum’s market value had fallen 36 percent this year to $523.5 million as of last week, less than one-twentieth the size of NetApp.

In 2009 EMC bought Data Domain Inc., which also eliminates duplicated data, for about $2 billion, outbidding NetApp.

Data Domain has been “growing quite rapidly within EMC, but it could have been growing rapidly in NetApp instead,” FBN’s Seyrafi said in a phone interview. “They could acquire Quantum, which would allow them to get more involved in deduplication. It’s been a business they’ve wanted since they made a bid for Data Domain.”

‘More Like EMC’

While NetApp has plunged more than the S&P 500 this year, EMC only slipped 4.5 percent through Nov. 25, outperforming the benchmark gauge for U.S. equities. In the past 10 years, EMC has spent $10.9 billion on takeovers as the company diversified into products for security, analyzing data and running computer servers, according to data compiled by Bloomberg. NetApp spent $844 million in the same period.

“The company should be a little bit more like EMC,” said ISI’s Marshall. “They buy companies and they use their scale to push the acquired products through their channel.”

NetApp itself has been the subject of takeover speculation after it missed out on Data Domain and Hewlett-Packard Co. won a bidding war with Dell Inc. to acquire data-storage company 3Par Inc. at a 235 percent premium last year.

With NetApp last month reaching its cheapest level relative to earnings since January 2009, it may be a target for a company looking to bolster its position in data storage, Peter Karazeris, a Minneapolis-based analyst at Thrivent Asset Management, which manages about $73 billion including NetApp shares, said in a phone interview.

While Karazeris said NetApp may be better off focusing on its new products next year than on takeovers to revitalize growth, the company needs a broader offering to be a more complete solution for its customers, according to Janney Montgomery’s Choi.

“They’re between a rock and a hard place,” Choi said. “As you get to be a bigger and bigger vendor, you need a more filled out solution set, which EMC has done a good job of. If you’re NetApp’s size, you have a pretty good solution today, but they’ll have to do acquisitions to be more a la carte to meet the needs of their customers.”

--With assistance from Peter Burrows and Tom Giles in San Francisco and Tara Lachapelle in New York. Editors: Sarah Rabil, Daniel Hauck.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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