So far this year, Wall Street has gone gaga for storage IPOs, as seen with highfliers such as Compellent Technologies (NYSE: CML) and Data Domain (Nasdaq: DDUP). But Dell (Nasdaq: DELL) is also paying attention, and yesterday, the computer maker announced its $1.4 billion agreement to buy EqualLogic, a storage provider that was prepping for a public offering.
EqualLogic's solutions are based on so-called iSCSI technologies, which use Internet approaches. Their key benefits include lower costs and ease of use, making it possible to effectively sell to the midmarket.
Since launching its products in 2003, EqualLogic's revenues have surged. For the first nine months of this year, revenue doubled to $90.9 million.
"Dell's got its hands on one of the rising stars of the storage market," said Simon Robinson, the research director for storage at The 451 Group, in a Fool interview. "Dell doesn't move into markets in a major way unless the upside is significant."
For example, a study from IDC forecasts that growth for the iSCSI market will go from $600 million in 2006 to $6 billion in 2011. So it should be no surprise that Dell is willing to pay about 14 times revenue for the company now; other players like Data Domain and Compellent sport similar multiples.
But Dell faces several challenges with its new acquisition. Currently, EqualLogic sells its products through a network of more than 480 active channel partners. Might Dell's direct-sales model scare off some of these partners, leading them to rivals like IBM (NYSE: IBM), Network Appliance (Nasdaq: NTAP), and 3PAR? The acquisition may also disrupt Dell's alliance to sell EMC's (NYSE: EMC) storage products, which compete with EqualLogic's.
More importantly, Dell has been M&A-shy over the years. Buying high-growth companies can be far from easy and Dell is not an expert in the complex world of storage. So while this deal offers growth for Dell, it will also require strong execution.
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