September 8, 1999 4:40 PM PDT

Dell makes first corporate acquisition

Dell Computer made the first corporate acquisition in its history today, buying a maker of high-end storage hardware and software for about $340 million in stock.

Dell PowerVault 130T The purchase of CovergeNet will expand Dell's PowerVault line of data storage products, the companies said. The move will let the PowerVault products connect to many types of servers, including those running Windows, Unix, NetWare, and Linux operating systems.

ConvergeNet is a privately owned player in the storage area network (SAN) market. Storage networks basically are separate networks that connect servers and storage devices with high-speed "Fibre Channel" technology. They're designed to unburden the increasingly overloaded primary networks.

The acquisition strengthens Dell's push into storage and higher-end servers that can be used in data centers and "glass house" control room environments, an area where profit margins are wider but customers more demanding. Chief executive Michael Dell has said the company will sell more powerful Unix systems once Intel's 64-bit Merced processor arrives. IBM, Hewlett-Packard, and Compaq are already significant players in the Unix computer market.

The deal is one of a spate of recent changes in the high-end storage landscape. Hewlett-Packard recently dumped EMC for its top-end products and instead signed up Hitachi Data Systems as a supplier. EMC plans to acquire Data General, which claims well-regarded Clariion storage products and has been a partner with Dell. IBM recently launched a new high-end storage product called Shark, while Sun Microsystems has delayed its multi-server storage product altogether.

Research firms have blessed the storage network concept, and major companies such as IBM, Compaq, Sun, and HP all have SAN initiatives under way. However, the technology has suffered somewhat because it's been difficult to ensure that all the components that make up a storage network, such as switches, hubs, and disk arrays, can work together.

Today's acquisition shouldn't be taken as a new pattern for Dell, though, said chief financial officer Tom Meredith in a conference call. "We are not averse to acquisition," he said, but acquisitions have "a long track record of failure" when not focused on particular products.

Dell gets 120 new employees with the acquisition. "What we really are acquiring is talent and technology," Meredith said.

Looking at EMC
Dell's current SAN technology can connect only to Dell servers running Windows NT and Novell Netware, said Michael Lambert, senior vice president of enterprise systems.

"We realized we need to broaden that strategy," Lambert said. "What this means is our sales force is free to sell our SAN products into non-Dell markets," he said.

The ConvergeNet equipment resides between servers and the actual storage devices, Lambert added.

The acquisition puts Dell in a market position closer to EMC, a company that in the past has beat out the big conglomerates in the storage field. But Dell has been cautioning its sales force not to say that Dell's products are challenging EMC's, said Lambert.

"We have been very cautious coaching our sales people not to go against EMC and overcommit," Lambert said. In the future, though that could change. "Over time, we believe our product offerings will be very broad-based," he said.

ConvergeNet chief executive Dick Watts will become vice president and general manager of Dell's storage systems division as part of the deal, leading a combined Dell and CovergeNet storage systems workforce.

In September 1998, CovergeNet announced that it had lured Watts away from HP to become chief executive.

Dell spokesman T.R. Reid confirmed that today's acquisition was Dell's first in its history.

Dell examined more than 30 companies before deciding on ConvergeNet, Lambert said. One of the appealing features of ConvergeNet was that its products, while largely developed, weren't yet being built and sold in large volumes--a fact that made the acquisition simpler.

"The company has kept a fairly low profile as they've developed this. Their coming-out-party was to be in about six to eight weeks," Lambert said.

The new, Dell-branded storage products are likely to arrive in 2000, Meredith said.

Dell will take a charge of 5 to 7 cents per share for in-process research and development in the quarter when the deal closes, the company said. The deal is expected to close in 60 days, Meredith said. Boards of both companies have approved the merger.

 

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