Dell To Pay $1.4B for EqualLogic

Personal computer maker Dell said Monday it has agreed to pay $1.4 billion in cash for EqualLogic Inc., which makes data-storage network systems, in another move to boost growth by looking outside its traditional PC business.

Data storage accounted for only 4 percent of Dell's revenue last year but is growing much faster than PC sales.

In the first nine months of this year, EqualLogic had sales of $91 million and lost $1.9 million, although it turned a profit in the July-September quarter, according to regulatory filings.

Round Rock-based Dell Inc. said the deal is expected to close early next year and would reduce earnings by 2 to 5 cents per share for fiscal 2009 and 2010. The figure excludes the amortization of intangibles.

Chief Executive Michael Dell said acquiring EqualLogic bolstered his company's lineup in the fastest-growing part of the storage industry. Dell, who returned in January as CEO, said it was the company's sixth acquisition in two years.

EqualLogic's systems use proprietary software designed to simplify how businesses store and manage data. The company says its target customers are medium-size businesses that can't afford costlier storage area network systems.

Research firm IDC estimates spending on virtualization software and services will exceed $15 billion worldwide by 2011, up from $6.5 billion last year.

Virtualization is intended to let companies manage large amounts of data with less hardware. Dell acknowledged it could affect demand for his company's hardware.

"While you might find any given particular customer who has more revenue or less revenue because of virtualization, we know these technologies are available and so we embrace them," he said in an interview.

EqualLogic CEO Donald Bulens said virtualization would help hardware makers by creating new demand for storage products.

Analysts said the deal means Dell will develop more of its own storage products, putting it in competition with data-storage gear maker EMC Corp., which counts Dell among its largest customers.

JP Morgan analyst Bill Shope said Dell would still rely on EMC for traditional storage customers while using EqualLogic to sell to midsize businesses.

Dell shares fell 8 cents to $29.97 Monday, and EMC shares dropped $1.06, or 4.3 percent, to $23.49.

The deal was announced as EqualLogic prepared for an initial public offering. EqualLogic filed for an IPO in August, and company executives planned to begin an investor road show Tuesday. No date had been set for the stock sale.

Software virtualization company VMware Inc. went public in August in the largest tech IPO since Google's three years earlier.

EqualLogic got seed funding from Charles River Ventures and eventually received more than $50 million in backing from that and other venture firms.

Christopher Baldwin, a Charles River partner and EqualLogic board member, said Monday's deal was the largest all-cash acquisition of a venture-backed startup. Most purchases include at least some stock as currency.

Dell expressed interest on and off for several years before negotiations became more serious in recent months, Baldwin said.

The starting point on negotiating a sale price was set by the recent IPOs of two other tech companies with similar growth rates and gross profit margins, Riverbed Technology and Data Domain, Baldwin said.

EqualLogic, based in Nashua, N.H., has more than 3,200 customers in 30 countries.

Other topics that Michael Dell touched on:

A bigger retail strategy. The company, which long depended on selling desktop and notebook computers and other items directly to customers, will announce new retail outlets over the next 18 months. It already sells computers at Wal-Mart Stores Inc. and has struck deals with Staples Inc. and retailers in Japan, China and Britain.

"Six months ago, I think we had zero stores where you could buy Dell product, and now we have about 10,000 stores," he said. "Just stay tuned for additional announcements."

Sticking with XP. Dell was asked how long his company will build PCs with the XP operating system instead of Microsoft Corp.'s newer Vista system, which had mixed reviews.

"When customers tell us they don't want [XP] anymore," he answered. "We can load many different flavors of Windows or other operating systems for that matter."

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