EMC Acquires Isilon Systems -- Now the Real Work Begins

OK, we knew this was coming -- it was just a matter of when. Hopkinton, MA-based data storage giant EMC (NYSE: EMC  ) announced today it will acquire Seattle-based Isilon Systems (Nasdaq: ISLN  ) for $2.25 billion in cash. EMC is paying $33.85 per share, a 29 percent increase over Isilon's previous closing price of $26.29. (Takeover speculation drove Isilon's stock up to $26-28 in the past few weeks, and the high price of the acquisition has reportedly been an issue in negotiations.)

The deal, which should be completed by the end of the year, fits with EMC's broader strategy of growth through acquisitions. Technology-wise, Isilon fills a need for EMC in the area of network-attached storage, which is a way for companies and organizations to manage huge amounts of data for multimedia, online services, and other applications. The acquisition is one of EMC's biggest -- even larger than the $2.1 billion purchase of Data Domain last year. The latter deal has been quite successful for EMC, so we'll see if it follows the same game plan for integrating the Isilon team -- that is, leave the technology and sales teams intact and add massive distribution.

Isilon has a long history of ups and downs. The company started in 2001, co-founded by former RealNetworks engineer Sujal Patel. The idea was to provide cheaper and more efficient data storage for companies needing to host or deliver multimedia content that requires lots of storage space. Isilon attracted venture funding from Madrona Venture Group, Atlas Venture, and Sequoia Capital.

Data storage was (and still is) a brutally competitive field, but Isilon's technology set it apart. Its approach was to cluster together a large number of storage "bricks" -- each one including disks, memory, processing, and networking -- into a single storage unit. This was an inventive way to do network-attached storage, which is now a multibillion dollar industry.

Isilon flew high and raised $108 million in an IPO at the end of 2006. Then things started to go bad. Very bad. By the next year, the company was failing to meet its own sales projections, and its stock price had plummeted. Patel, who was then chief technology officer, was appointed CEO in late 2007, to turn things around.

It has been a long road back -- focusing on R&D, making product distribution more efficient, and hiring a new senior management team. But early this year, Isilon posted its first quarterly profit in its 10-year history. Its customers include Sony, XM Radio, LexisNexis, Facebook, MySpace, Kodak, Adobe, major movie studios and TV networks, government agencies, and biomedical research organizations (a particularly fast-growing sector).

Some in Seattle will lament the loss of a mid-size public tech company that is owned and operated locally. Judging from EMC's way of doing business, though, Isilon's team and employees probably will remain in Seattle. If it's a good cultural fit, the acquisition should help Isilon's business expand globally.

And Isilon's venture investors should make out very well from the deal. At last count, Seattle-based Madrona Venture Group still owned some 5.8 million shares of Isilon and has representation on its board (Matt McIlwain). What's more, Isilon's chairman is Bill Ruckelshaus, one of Madrona's strategic directors. Madrona's remaining stock amounts to about $196 million by the terms of today's deal. Not too shabby, considering Isilon raised less than $70 million in total venture financing (by my count) prior to its IPO.

Reached by phone today, Madrona said it invested a total of $15 million in Isilon and expects its overall return to be 15-20 times its investment. Not to be outdone, Boston-area-based Atlas Venture, Isilon's largest shareholder, said its proceeds are $473 million, and its multiple is 20x. [This paragraph was added to provide more VC specifics---Eds.]

We'll be watching to see what people have to say about the deal -- and how the integration of Isilon into EMC goes.

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Gregory T. Huang is Xconomy's National IT Editor and the Editor of Xconomy Boston. You can email him at gthuang@xconomy.com, call him at 617-252-7323, or follow him at twitter.com/gthuang.

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