Acquisitions and mergers are becoming all the rage in the storage industry and this past week did not disappoint. On Monday storage reseller Promark announced it was going to merge with IceWEB and then, just two days later, NetApp announced its intentions to acquire Engenio, LSI Corp’s external storage unit.
On the surface the merger between IceWEB and Promark is small potatoes when compared to NetApp’s announced $480 million acquisition of Engenio. IceWEB only sells a fraction of the storage of what Engenio sells and is pretty much focused on the SMB market.
But what piqued my interest about this merger and prompted me to listen in on the analyst call (IceWEB is and remains a publicly traded company) was, “Why would Promark, a reseller of such storage systems from Compellent (now part of Dell,) IceWEB, Nexsan, RELDATA, and Scale Computing suddenly merge with one of its storage manufacturers?“
This question was answered pretty well by Promark’s President, Dale Foster, on the analyst call. He explained that he had worked with up-and-coming storage providers like IceWEB before and specifically cited Data Domain (now part of EMC,) EqualLogic (now part of Dell) and Lefthand Networks (now part of HP and known as the HP StorageWorks P4000.)
In each case Promark had early-on identified these companies and their products as innovators in the storage space. In most of these cases and at the point when Promark started selling them, these storage vendors were only doing a few million dollars of revenue annually and were looking to grow their channel presence. So in return for Promark agreeing to sell their products through its channel, Promark realized some nice margins on their products.
However what happened in all three of these cases is that each of these companies were eventually bought out by vendors who Promark did not represent. So if Promark did continue to resell these products, Promark’s margins were slashed to about 5% of the sale price. These low margins would force Promark back to finding another comparable storage product and provider who was again doing a few million dollars worth of sales and looking to grow.
Foster said he was beginning to see this same scenario play out again with IceWEB. IceWEB offers a private cloud storage solution that is primarily targeted at SMBs plus it comes with a very competitive price point. Further, as hot as cloud storage is right now and with him starting to see sales of the IceWEB product accelerate, Foster could already see a day coming in the not-too-distant future when IceWEB would be acquired by a larger player.
So rather than Promark again building IceWEB from nothing into something and then letting someone else swoop in and reap all of the benefits, he decided that the time to act was now. So by Promark merging with IceWEB, Promark assures itself that it also is a beneficiary should IceWEB ever get purchased by a larger storage provider. Further, if it is purchased, Promark (now IceWEB) does not have to start over again by identifying a new line of storage to sell as it can continue to sell IceWEB products if and when it is ever acquired.
IceWEB’s interest in agreeing to merge with Promark stemmed from Promark’s extensive network of resellers – approximately 1200. On the call IceWEB’s CEO shared that if IceWEB continued to go at it alone, it was going to need to raise a substantial amount of capital to build out a channel. By merging with Promark, IceWEB immediately got access to Promark’s extensive channel while Promark got its hands on a storage system that it evidently believes can take it to the next level.
So what will be interesting to watch is if Promark has the ability to transform itself from being a distributor/reseller of computing gear to essentially being a manufacturer of it. As it does Promark must also maintain relationships with a number of other storage providers for which it also resells storage.
While I understand Promark’s argument when it claims that there is little or no overlap between these different product lines and IceWEB, one has to wonder how much incentive Promark’s resellers will have to resell Compellent, Nexsan, RELDATA or Scale? After all, Promark will own and manufacture IceWEB products in house and is even changing its name to IceWEB. So how weird would it be for an IceWEB reseller to come in house and say to a customer, “I think you should buy Nexsan (or whatever) today.”
That said, this is an interesting move by a reseller to suddenly transition from being a storage reseller to a storage manufacturer. Further, if it should successfully execute on this transition, one has to wonder how many other distributors and resellers are not going to look to follow Promark’s lead.
I was also going to comment on the NetApp acquisition of Engenio in this blog entry but there are a few more questions I want to get answered first before I comment on that subject extensively. So I will just save my thoughts on that topic for sometime next week.
Have a good weekend!