The storage industry has been abuzz recently with rumors and preliminary filings by startups for initial public offerings (IPO) of stock, the first steps toward new publicly traded players in the market.In the last six months, Isilon Systems Inc., Double-Take Software Inc., CommVault Systems Inc. and Riverbed Technology Inc. have all filed Form S-1, a Securities and Exchange Commission preliminary registration document that details a company's proposed IPO and estimated stock price. Meanwhile, other successful private companies, like EqualLogic Corp., BlueArc Corp., PolyServe Inc., Compellent Technologies Inc. and 3PARdata Inc., are rumored to be considering going public in the near future.
Of course, even registration for an IPO isn't a guarantee that a company will go public, and it's a far cry from a guarantee that the company will be successful. The last attempted storage systems IPO, LSI Logic Corp.'s planned spin off of its Engenio Systems division, was pulled off the market a little over a year ago. No storage company has succeeded in going public since Xyratex two years ago, and at least three of the companies now considering it -- Isilon, Riverbed and Double-Take -- are not yet profitable.
It's mostly good news, analysts say
The biggest benefit of successfully going public is that more capital is poured into the foundation of a company. More capital resources, according to Brian Babineau, analyst with the Enterprise Strategy Group, means more investment in research and development , and possibly even better customer service.
"Usually, startups outsource or have minimal investment in customer service," Babineau said. Public companies are also competing in a much faster paced arena where they are scrutinized more by competitors and have to execute better on roadmaps. While this presents a significant challenge for the companies themselves, greater accountability can be a boon for users who can expect newly public companies to adhere more strictly to product-release cycles.
Then there's the matter of more and better competition. "A new class of public companies would change the dynamic in the storage industry, especially as it has been over the last six or seven years, which have allowed so-called Tier-1 players to get a little lax from a competitive standpoint -- as they haven't had to challenge customers as much for attention," said Brad O'Neill, senior analyst with the Taneja Group.
It could also make competition-dulling merger and acquisition (M & A) consolidation more difficult for the big guys, O'Neill said. "Tier-1 vendors may have to come to the table to acquire very expensive public companies that they could have acquired for a fraction of the cost three years ago."
What's more, more freedom and means to partner for new public companies could bring more players into the storage market at the same time, O'Neill said. Meanwhile, according to Babineau, newly public companies could acquire more capital for their own M & A activity, meaning that "some smaller guys, who might not have made it, may have just found more alternatives to keeping their technology alive -- and that's very good for innovation in the industry."
While the positives generally outweigh the negatives, the analysts said, that doesn't mean there aren't potential pitfalls to the IPO process. For one thing, when a company that began as a nimble, innovative startup becomes a larger player, it can lose flexibility, both in terms of the development of products themselves and in its pricing.
"In the early days, companies are usually out there doing a 'land grab' -- it's about mind share and recognition, and getting as much of both as possible," Babineau said. After going public, companies have to answer to shareholders every quarter with demonstrably steady revenues -- and so are less flexible in their pricing.
Short-term thinking hinders innovationAccording to Brian Garrett, technical director of ESG Lab, "[another] danger is becoming more short-sighted and losing long-term vision for innovation and developments because of an over focus on short-term earnings goals."
Ultimately, the difference between a company that retains its startup spirit while acquiring the financial power of a public company and one that doesn't is the ability of the company's management team to make the right strategic decisions at the right time.
"The tradeoffs are, these companies could get the resources to really start building and innovating on what they've started, but are they going to get defocused?" O'Neill said. "The fact of the matter is, some companies manage that well and others don't."
Ultimately, if a company has been a good partner to a user, the analysts said, it's probably worth the risk to stick with it as it navigates IPOs. "The bottom line," said Garrett, "is that to please their shareholders, they first have to please their customers."