NTAP May Be A Takeover Target, But…

The shift to IP-based Ethernet storage will increase over the next three years.
As the underlying Ethernet storage base expands from 1 Gig to 10 Gig. At 10 Gig,
this will make it faster and more cost effective than SAN, NAS and even Fiber
storage. Ethernet storage could leapfrog the other storage alternatives and
become the standard storage architecture. And NetApp is the only pure vendor in
the Ethernet space.

In this sub-sector of the storage business, Network Appliance
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is the best pure-play, Ethernet storage vendor. Ethernet storage is the only
product / technology that NetApp focuses on; whereas other competitors are
broader-based, and conduct business in a number of storage tech segments. I’m
sure there is competition in IP-based Ethernet storage, but NetApp is positioned
well if my view about the shift to Ethernet storage is correct.

Network Appliance is, to the best of my knowledge, the only pure play in
Ethernet storage sector. That said, I doubt the other storage players will stay
away as things eventually move, and consolidate, in that direction: the
networking vendors in particular will have an incentive to move into this
business.

Frankly, I think Network Appliance could make a good acquisition for somebody
eventually. Hypothetically, Cisco Systems would be a logical acquirer,
both in terms of synergy with its current product offerings and geography. (Both
companies also just happen to be located less than a mile away from each other.)

Storage is increasingly going to be part of the network, rather than part of the
computing hardware. Integrating storage more tightly to the network gear, and
building the network around it, will be important for offering end-to-end
solutions. Cisco currently offers some pieces of that puzzle, but not the actual
Ethernet storage appliance. Network Appliance offers the Ethernet storage
appliance, but not all the networking gear or the end-to-end solutions that need
to be in place for that appliance to be most useful.

In the past, Cisco has tended to acquire companies earlier in their development
cycle than where NetApp is today. So, perhaps Cisco would be more likely to find
and acquire a small competitor to NTAP, scale them up and then try to leverage
its overall product portfolio to squeeze NetApp out. Cisco would get better bang
for the buck this way. (And management could take more credit for it…)

That said, to some degree the environment has changed too. The post-2000
slowdown in venture funding means there are less companies in the 3 to 5 year
old category than there were for a while. So there are fewer good pickings. And
Cisco itself is more mature, so to the extent that they want to acquire
companies with good products they may have to look at more mature ones than they
usually have.

I’ll reiterate my belief that NetApp is probably a good takeover for somebody.
Maybe for one of the other networkers; maybe for one of the two remaining “buy
everything from us” vendors — IBM and Hewlett-Packard. Potential international
buyers include Huwei: I suspect that that company could end up with 3Com with
whom it already has a JV — and to the extent that it wants to be a major player
in all things “networkable” it could be an interesting move.

There are obviously other ways for this all to come together. Value added
resellers (VARs) and integrators of various types are currently filling that
role. But the market for network storage is still somewhat immature. The fact
that companies like the reseller mentioned at the beginning of this article see
the logic of a networking reseller getting into storage suggests to me that
others in the networking-related businesses are seeing the same logic.

However, the flip side could be argued as well. Network Appliance is more
valuable if it’s independent of the specific brand of network hardware. There’s
a case to be made for that as well. However, the direction many areas of
technology are moving is towards consolidation, and sellers of single
stand-alone solutions are likely to get swallowed by bigger companies in order
to provide more comprehensive “end-to-end” solutions.

One thing about Network Appliance: While it may eventually be a takeover target,
it’s unlikely to happen with the stock trading as high as it’s now. But if the
company stumbles — with execution or in one or more quarterly results — then a
drop is NTAP stock price could make it more attractive to a potential buyer.

One final thought: Where do we suppose Larry’s little company fits in here? And
what are we to make of EMCs
acquisition
of VMware last year  as a potential source of differentiation getting
around the plain old storage boxes? I don’t know myself.

Melanie Hollands