Decru's Asking Price Steep But Worth It
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High-tech pundits and analysts don't have a hard time agreeing that storage and security will ultimately meet in the middle to blaze some significant trails for data protection.
People just don't always agree on the cost it could take to get there. Consider that skeptics hemmed and hawed about Symantec's colossal bid to buy storage software maker Veritas for $13.5 billion.
The latest target of wonder is Network Appliance's $272 million bid for storage security device maker Decru, which left financial analysts grilling NetApp CEO Dan Warmenhoven on a conference call yesterday about how NetApp would assimilate Decru in its mix of storage hardware and software.
Merrill Lynch analysts said in a research note that the purchase price for Decru is rather high. Consider that the most analysts believe that Decru will generate $35 million in sales in fiscal year 2006, which is six times what the outfit is expected to make in fiscal year 2005. It follows that the $272 million stock and cash bid is 8 times what experts believe Decru will earn next year.
So the purchase is a gamble and can, in some folks, spark the kind of skeptical concern reserved for Sun Microsystems' agreement to buy StorageTek.
But it's a risk that most folks feel will reap many rewards considering the glut of security breaches or lost tape cartridges housing crucial personal information like bank account and Social Security numbers.
Most analysts seem to believe the upside of this deal is excellent. The fact is that securing stored data has become a flashpoint in the wake of a rash of lost data tapes from banks like Bank of America, CitiFinancial.
Time Warner earlier this year reportedly lost backup tapes containing 600,000 employees' social security numbers. Then there are the data breaches at universities and ChoicePoint.
Experts agree that hand-wringing over lost storage cartridges is considerably lessened if the data is encrypted, which is exactly the kind of technology Decru provides with its DataFort appliances. DataFort works pretty nifty, too.
Typically, an IT administrator sets up the device between the host server and storage infrastructure. As data passes through the appliance, the data is encrypted before it is placed in a storage array or on tape. The data is only usable when it is pulled back and then decrypted through the encryption appliance.
The technology points straight to the heart of convergent storage and security.
The 451 Group analyst Sonia Lelii outlined pros and cons of the deal in a research note.
"There is no denying vendors believe a storage and security portfolio is a convincing pitch for C-level executives," Lelii said. "The NetApp and Decru merger should be more seamless than the Symantec and Veritas pairing."
Lelii believes this because NetApp and Decru are already partners, with half of Decru's sales associated with NetApp systems. The question is whether NetApp's ownership of Decru will alienate the startup's partnerships with EMC, Hewlett-Packard, Sun Microsystems, IBM, Hitachi Data Systems, StorageTek, BlueArc, among others, she said.
"The obvious risk behind this merger is that those partners will be wary of bringing Decru -- and by default NetApp -- into established accounts," Lelii said.
One thing that could unfold in NetApp's favor is that Decru will be run as a separate business from its headquarters in Redwood City, Calif., with current CEO Dan Avida leading the way.
NetApp has no plans to integrate the appliances or the encryption software into its broad product portfolio, reinforcing the maxim that is something isn't broke it shouldn't be fixed. The appliances will continue to be sold as stand-alone products and won't be limited to NetApp's own storage devices. Decru also has great penetration in the government sector.
Of paramount importance for Decru is keeping its partnerships with vendors that compete with NetApp, such as EMC.
NetApp skipper Warmenhoven summed up the deal on the call: "Customers have historically had to make a trade-off. They could have security or simplified data management. Together, NetApp and Decru will be able to provide both."
This could be the first of a handful of deals, too. While Decru's deals with EMC, Sun, HP and others would seem to be intact, it's quite possible that NetApp will spark its rivals to acquire the remaining storage security gear makers, Vormetric, NeoScale and Kasten Chase.
For competitive and revenue potential, it would behoove NetApp's competitors to make investments in storage security. The cost cold be well worth it.