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EMC had no serious rivals for Isilon

Unlike Data Domain and 3PAR, clustered NAS vendor Isilon received a $2 billion-plus acquisition offer without benefit of a bidding way. EMC made the only offers for Isilon leading to the $2.25 billion deal it announced a week ago, according to documents Isilon filed with the SEC.

Isilon’s price apparently got a boost from its sales last quarter, however, as EMC showed renewed interest after Isilon’s Oct. 21 earnings report.

According to the filing, EMC representatives first approached Isilon last April to discuss an OEM deal and raised the possibility of an acquisition in August. EMC made its first offer of $27.50 per share Sept. 7. Isilon contacted other companies its executives thought might be interested in buying it and entered into confidentiality agreements with two companies but neither submitted an acquisition proposal.

Isilon turned down EMC’s offer anyway, and EMC increased its bid to $30 per share Oct. 2. Two days later, Isilon made a counter offer of $36 per share. EMC responded that it “might be able to support a price of $33.00,” Isilon repeated its request for $36, and CEOs Joe Tucci of EMC and Sujel Patel of Isilon agreed they would announce a deal during Isilon’s earnings call if they reached a deal by then. However, on Oct. 20 EMC informed Isilon it would not pursue a deal “at that time.”

The next day Isilon reported impressive strong third−quarter earnings of $53.8 million in revenues and $4.0 million in net income, and Patel said the vendor was moving ahead with future plans as a standalone company. At EMC’s request, negotiations resumed Nov. 1 and EMC offered $32.50 on Nov. 13. Isilon countered with a request of $35, and EMC made another offer of $33.85 or $2.25 billion. Isilon accepted that offer Nov. 14, and the companies announced the deal the next day.

There had been speculation that at least one other company bid for Isilon because of the price EMC paid, but one Wall Street analyst suspects Hewlett-Packard’s $2.35 billion buyout of 3PAR raised the price for storage acquistions.

“We believe EMC overpaid for the deal, but not in a desperate move,” Wedbush Securities analyst Kaushik Roy wrote in a note on teh deal last week. “We believe HP overpaid for 3PAR thereby setting a high bar for valuation, which EMC has now followed by overpaying for Isilon.”

In any case, Isilon came a long way in the three years since founder Patel took over as CEO following an embarrassing incident when the company had to restate earnings because of improper revenue recognition. Patel continued to invest in technology and boosted sales enough to finally make Isilon profitable at the start of this year.

As a vendor entrenched in niche markets such as gas and oil exploration and rich media, Isilon also built a close following with its customers. Some of those customers are nervous about whether EMC can do as good a job.

“I have mixed feelings,” said John Welter, vice president of technology at Calgary, Alberta-based North West Geomatics Ltd., and an Isilon customer since the early days. “I think it may be good for Isilon because now they can worry about the engineering and innovation side and less about other things that EMC can now look after for them.

“The concern I have is that EMC products – particularly Clariion and the low-end Symmetrix – are extremely conservative equipment. EMC’s products are built solid but there’s nothing revolutionary about them. Isilon is going down a totally different path on storage. Isilon built revolutionary storage. EMC’s products are on an evolutionary path rather than a revolutionary path.”

Welter said he is also concerned with how the deal may affect his relationship with Isilon’s sales team.
“After five or six years of know the sales director in this region, there’s a comfort level,” he said. “I’m a little concerned about what happens with that side, and will I have to start developing a new relationship? Relationship is important when you’re spending a lot of money on storage, and it’s the foundation of your business.”

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