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In storage, 2016 M&A centered on networking, hyper-convergence

Broadcom's $5.9 billion deal to buy Brocade and transactions involving hyper-converged vendors and cloud provider Rackspace highlight storage mergers and acquisitions in 2016.

All mergers and acquisitions, or M&A, in the data storage world may forever pale in comparison to Dell's $60 billion-plus...

deal in 2015 to purchase EMC. The transaction closed in September 2016 and remained the talk of the industry throughout the year.

But there were other billion-dollar storage acquisitions this year, as well as plenty of smaller deal activity in the hyper-converged market, with 2016 M&A news involving market leader Nutanix, Pivot3 and Gridstore.

In the largest storage deal of 2016, Broadcom Ltd. moved to further consolidate the Fibre Channel (FC) industry with its $5.9 billion agreement in November to purchase Brocade Communications Systems Inc. If the deal passes regulatory muster, it will leave only three major vendors selling FC storage networking products.

Cisco sells FC switches, like Brocade, but it is noted more for its Ethernet-based networking products.

For years, Emulex Corp. and QLogic Corp. dominated the FC host bus adapter market, until semiconductor providers scooped them up in the past two years. Cavium announced plans to buy QLogic in June for about $1 billion, just over a year after Avago Technologies closed on its deal to purchase Emulex for $609 million, including cash and acquired debt.

Earlier this year, Avago closed on a blockbuster $37 billion deal, announced in May 2015, to acquire another semiconductor specialist, Broadcom Corp. Avago took the Broadcom name when the acquisition closed in February 2016. It is this version of Broadcom that has agreed to the buy Brocade.

The Brocade acquisition would make Broadcom the primary vendor of the two main components of a Fibre Channel infrastructure -- switches and host bus adapters (HBAs). That could open the door to antitrust scrutiny in the U.S. and abroad. Broadcom said it expects the transaction to close in mid-2017.

Broadcom plans to divest Brocade's IP business, which includes wireless and campus networking, data center switching and routing, and software. Broadcom CEO Hock Tan explained during a conference call that Brocade's IP networking technology would pose a competitive threat to his company's semiconductor customers. Those customers include OEM system vendors Dell Technologies, Hewlett Packard Enterprise and IBM. Many Broadcom OEMs also sell IP switches.

Tan called Brocade's FC SAN switch business "a very sustainable franchise, with phenomenal profitability." Brocade's FC revenue exceeded $1 billion in 2015, according to Dell'Oro Group. But Dell'Oro's market projections show FC product shipments in gradual decline and FC revenue to be roughly flat, at $2.2 billion, in 2016.

Industry analysts said they don't expect the Brocade-Broadcom merger to have a significant effect on the FC SAN market's trajectory. Enterprises with investments in FC are likely to continue to use the time-tested storage networking technology for mission-critical workloads, despite the growing popularity of IP-based networking for storage.

Although FC's growth potential is low, Cavium envisioned enough of an upside with HBAs to attempt its first foray into mainstream storage. Cavium CEO Syed Ali cited the ongoing transition from 8 Gbps to 16 Gbps FC and the expected shift to 32 Gbps in 2017 and 2018 as all-flash arrays grow in popularity as drivers of FC sales. Ali claimed all-flash arrays have an FC attach rate of 70% to 80%.

Hyper-converged vendors' 2016 M&A

Three hyper-converged vendors challenging the traditional FC SAN storage model bolstered their offerings through 2016 M&A activity. Hyper-converged products combining compute, virtualization and storage in the same box have gained popularity among users seeking to reduce the complexity and costs of IT infrastructure.

In August, hyper-converged pioneer Nutanix bought startups PernixData, which focused on flash and RAM caching software, and Calm.io, a DevOps automation vendor. Nutanix said the acquisitions would facilitate new software stacks for storage-class memory systems, cross-cloud workload migration, and cloud-focused orchestration and workflow management.

Nutanix did not disclose the terms of the two deals, which closed by the time of the newly public company's first financial earnings call in November. Nutanix completed its long-delayed initial public offering in September.

Joining the 2016 M&A ranks in January, hyper-converged rival Pivot3 merged with NexGen, which sells all-flash and hybrid arrays combining solid-state and hard-disk drives. NexGen's quality of service (QoS) and dynamic provisioning capabilities held particular appeal for Pivot3 CEO Ron Nash, who leads the fused company.

By June, Pivot3 had already released a product based on NexGen flash technologies. The vSTAC Service Level Extension combined Pivot3's hyper-converged infrastructure appliances with NexGen's N5 PCI Express flash array and QoS and dynamic provisioning software.

Hyper-converged startup Gridstore joined forces with container software startup DCHQ to form a new company, called HyperGrid. HyperGrid's goal is to provide hyper-converged infrastructure as a service to ease the deployment and management of applications across cloud or containerized application environments. Terms of the deal were not disclosed.

HyperGrid CEO Nariman Teymourian said the newly merged company would target traditional IT use cases, as well as DevOps storage. He said customers indicated they didn't want to buy hardware and preferred a model similar to Amazon Web Services. HyperGrid offers pay-as-you-go pricing options.

The Gridstore HyperConverged Appliance now uses the HyperGrid brand name. The DHCQ software is now called HyperForm and integrates with the HyperGrid cloud orchestration and provisioning layer.

Rackspace, Dell's Quest go private

Cloud provider Rackspace became a private company in November when its $4.3 billion transaction closed with Apollo Global Management. Another private equity firm, Searchlight Capital Partners, also made a strategic investment in Rackspace.

Rackspace initially tried to compete with the likes of Amazon and Microsoft, but now focuses on partnering with the major cloud providers to provide the customer service they may lack. Rackspace claims its customer base includes a majority of the enterprises on the Fortune 100 list.

A key part of Rackspace's business could encompass the open source OpenStack cloud platform that Rackspace and NASA co-founded in 2010. Some large cloud providers use OpenStack technology.

To make room for its EMC products, Dell sold off its Quest software group to private equity firm Francisco Partners and hedge fund manager Elliott Management, who took Quest private. Quest products include the DR Series of disk backup and deduplication appliances, as well as Rapid Recovery -- formerly AppAssure -- and Recovery Manager data protection software. Quest has so far been silent on its plans for the backup and recovery products.

Storage array vendor Nexsan will join Rackspace and Quest in the ranks of private companies. Financially troubled Imation Corp. plans to spin out its Nexsan storage business in the first quarter of 2017. Spear Point Capital Management LLC, a New Orleans-based hedge fund, is financing the transaction with a $2.5 million stake and directorship on Nexsan's board.

Imation CEO Bob Fernander said private ownership would give the company greater flexibility and help to accelerate growth. Fernander will remain as Nexsan CEO after the deal closes. He said plans call for publicly traded Imation to restructure and raise $100 million next year, then take a 50% stake in Nexsan. Spear Point and Nexsan employees would hold the rest.

Nexsan's product line includes the Unity block and file storage array with private cloud file synchronization, the Assureon archival and object storage, E-Series and Beast high-density block storage, and Transporter enterprise sync-and-share appliances, through Imation's 2015 acquisition of Connected Data.

The 2016 M&A in storage tools

Users of storage performance monitoring tools received interesting news in March, when Virtual Instruments and Load DynamiX announced plans to merge. The companies ultimately plan to integrate their complementary performance analytics and workload analysis and modeling products to create what they called an "end-to-end infrastructure DevOps platform."

Large joint customers of Virtual Instruments and Load DynamiX often sought to use the information gathered from both products. Load DynamiX CEO Philippe Vincent heads the newly merged company, which retained the name Virtual Instruments. HighBar Partners led a $20 million investment round into the combined company.

The merger has already borne fruit. Virtual Instruments leveraged Load DynamiX's Ethernet expertise to bring to market a NAS monitoring product in September.

In November, Virtual Instruments added to its infrastructure monitoring capabilities with the acquisition of Xangati, which focused on performance management for virtual server, virtual desktop infrastructure and hybrid cloud environments.

Virtual Instruments plans to expand its VirtualWisdom monitoring product with the Xangati technology. Len Rosenthal, Virtual Instruments' chief marketing officer, said Xangati adds capabilities for monitoring cloud and container environments.

Terms of the Virtual Instruments deals were not disclosed.

Next Steps

Dell seals deal to buy EMC

Questions hover over Broadcom-Brocade deal

Hyper-converged appliance market sees explosive growth

Dig Deeper on Storage vendors

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Which 2016 deal in the storage industry will have the greatest long-term effect?
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I think Mellanox will outpace eventually.
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