Why FalconStor, Overland, and Sepaton Ought To Be Acquired Before Isilon

The industry is buzzing with rumors that Isilon will be the next big storage acquisition now that 3PAR is safely in HP’s hands. The alleged buyer, EMC, is itself surrounded by rumors of becoming a shared feast for Oracle and Cisco. But there are much more accessible and tasty items on the enterprise IT acquisition menu, and the lower cost of entry makes them much more likely to come about!

Buying Talent, Technology, and Market Share

There are three good reasons companies look to buy others:

1. They lack the talent to play in a certain market. Although engineers are often touted as the prize in tech acquisitions, other kinds of talent (sales, marketing, and leadership) often make more of the difference. But buying talent is perilous because (especially in California), talent can walk out the door.
2. The next gap to be filled is technology itself. Startups are often more innovative and creative, filling new product niches and taking risks on new concepts. This manifests itself as product, of course, but IP and roadmap are equally important.
3. There is also market share to consider. Companies love to crow about their sales leadership, and very little matches the messaging that comes from overtaking a competitor in sales. Buying up a smaller, but not insignificant, competitor is a great way to achieve this!

There are a few more reasons companies get bought, of course. Companies sometimes build up vast cash reserves, making them ripe for a buyout. Others bring together assets that are more valuable split apart and sold off than together. Still other acquisitions are made to keep a competitor from having a key component of the market.

There are many great companies in enterprise IT, often packed to the gills with talent, technology, and market share. NetApp, EMC, Juniper, Symantec, and so many others are loaded with value, yet not all are about to be acquired.

What’s Stopping You?

It’s not easy for a company to buy another. The most-obvious roadblock is financial: As I discussed regarding Oracle, HP, and NetApp, companies can use cash, debt, or stock to make the purchase. Cash is clean and tidy, but each has its own trade-offs. At the end of the day, the purchase price can be too big a hurdle to overcome.

NetApp and Juniper have market caps around $17 billion, making them a very expensive purchase. Symantec is a little smaller at $12 billion, but it’s still large enough to be out of play for many companies. And EMC, at $42 billion, would be a historically-large acquisition, probably requiring more than one company at the table.

Although far smaller, Isilon begins to look expensive once one looks at the prospects for return on investment. Currently priced just under $2 billion, Isilon has solid clustered NAS technology and is a major player in high-performance computing. But they are not even ranked in the top external storage vendors according to IDC, and EMC and NetApp rule the mainstream NAS market. Their annual revenue grew respectably from $61 million in 2006 to $120 million in 2009, but that’s small-potatoes in enterprise IT terms. And with just $79 million in cash and short-term investments, they won’t be bought for plunder either.

Ripe Fruit

Isilon is just too small to justify a multi-billion dollar acquisition, but there are other tastier possibilities in play. Three in particular come to mind:

1. FalconStor has excellent technology, proven over a decade and used by thousands of customers. They have excellent OEM connections, too. And their recent CEO ousting makes them a killer bargain at under $150 million. Seriously — they could make that much revenue next year given a solid sales re-launch. at the very least, their  stock (NASDAQ:FALC) is a solid buy!
2. Overland (NASDAQ:OVRL) is in the midst of a re-birth, but their purchases of Snap and MaxiScale make them an acquisition target in my mind. Their astonishingly-small market cap of just under $17 million is less than their quarterly revenue. Yes, they’re losing money, but this would change quickly in the hands of a strong benefactor.
3. Finally there’s big-data protection specialist, Sepaton. It’s hard to say exactly what a purchase would entail, since Sepaton isn’t a public company, but it’s probably safe to assume that the price would be small and the acquired debt somewhat larger. But their technology is just waiting to be blasted prime-time by some big-data gorilla.

See the common theme here? Great technology, huge potential, and a miniscule price. Although none of these would be much of a market share win initially, all could be serious threats to the established players with some sales effort. Any of the big equipment companies (EMC, Dell, IBM, Oracle, or Cisco) would make hay with Overland, and any big software player (Oracle, CA, IBM, HP, or Symantec) would find much to love in FalconStor or Sepaton.

Stephen’s Stance

Although multi-billion dollar blockbuster deals are more fun to speculate about, smaller technology purchases like these can have much greater leverage. I expect at least one of these companies to be snapped up in the next year, and wouldn’t be surprised to see all three gone before Isilon, EMC, or Symantec. Indeed, I just don’t see the business case for an Isilon acquisition today.

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