2013 Storage Highlights

2013 M&A deal volume of 25 equals 2012 while total consideration jumps up to $9.5B, primarily driven by Avago’s Q4 purchase of LSI for $6.6B, representing 69% of the consideration for 2013.  In Q4 we also had Xyratex finding a home at Seagate for $374M and the “Hail Mary” merger of Tandberg and Overland. 

For the 25 transactions in 2013, the median deal size was $110M with a Price to Revenue Median of 5.0X.  There were 17 technology focused transactions with a median deal size of $98M and a Price to Revenue Multiple of 6.0X.  The remaining 8 transactions were business focused with a median deal size of $214M and a price to revenue multiple of 1.0X. 

In 2013 storage related venture funding was strong at $955M, a slight decline from 2012’s $978M.  The 43 rounds of funding had an average round size of $22.2M, similar to 2012’s $20.8M average round size for the 49 rounds.  2013 ended with two strong quarters of funding, $339M in Q3 and $249M in Q4, accounting for more than 60% of the year’s funding, which was driven by the Software and Systems segments. 

For the full report please contact John Rotchford, Managing Director, Strategic Advisory Services International, at john@sasillc.com.

This Storage Bubble Goes to 11!

Participants at The 451 Storage Executive Event and The Gartner Data Center Summit at the end of 2013 were perplexed by the amount of investing in storage ventures and the resurgence of storage related IPOs. While there was general agreement that areas like flash based storage systems and object storage are very promising, the sheer number of new players and associated marketing “noise” was troubling. There was sincere interest to learn about new solution sets but it was hard to differentiate among the players and decipher exact what application/user environments they could best serve. As an example, there were a number of all flash array and hybrid-array vendors offering some combination of de-dup, compression, scale-out features and management. They offered compelling cost/performance metrics but in many cases, the end customer was left to figure out exactly where and how to fit it into their application and storage architectures.

SASI Perspective:

Yes, we are in a bubble. As you will read in our year end Storage Market Review in January, storage related venture funding with be close to $1B for the second year in a row and the IPO market has heated up with Violin, Nimble and security and data protection provider Barracuda going out in 2013. The more interesting question to us is who the winners and losers will be this time around and what are the key factors and company attributes required to be successful. In addition, what do the end-state next generation IT environments look like 5 to 10 years out? There are plenty of “visions” out there but it is still early days. What we are seeing is the commoditization of storage and the movement to web scale environments across public/private/hybrid clouds. In addition, we are seeing new levels of virtualization, automation and overall convergence which offers new levels of IT efficiency, continuity and scale. In terms of who the winners and losers will be, we see a few key “must haves” in this emerging IT landscape:

– Demonstrate a clear path to profitable growth in the face of flat to declining margins

– The ability to scale the business while driving down customer acquisition costs

– Developing product differentiation beyond lower cost

– Comprehension of where the company fits within the larger IT framework and locking in key strategic partners early

The World is Flat

The most sobering insights from The 451 Storage Executive Event and The Gartner Data Center Summit at the end of 2010 came from talking to enterprise end users about IT budgets, managing legacy systems and adopting new lower cost architectures across the enterprise. The majority of IT administrators are dealing with the brutal combination of increased senior management expectations with IT budgets that are often flat at best and sometimes declining. Senior executives are pushing IT leaders to reach new service levels with the same level of funding. There are few Greenfield areas and innovation in Brownfield areas presents a host of challenges.

SASI Perspective:

Where there is enterprise IT pain there is certainly opportunity for disruption by new entrants. Start-ups coming at this market are targeting legacy systems with historically high margins and are providing both Capex and Opex relief in many cases. However, the incumbents are not going away any time soon and are ferociously defending their legacy territory. We see the most near term disruption coming in Tier 2 and 3 storage environments with Tier 1 remaining the home turf of the incumbents for the foreseeable future.