LSI buy may disrupt OpenStorage channel growth

NetApp is to buy LSI Corporation’s external storage systems business for $480m in cash as part of LSI’s move to become a “pure-play storage and networking semiconductor company,” according to Abhi Talwalkar, LSI president and CEO.

The LSI external storage systems business which develops and delivers Engenio external storage systems generated revenues of $705m in 2010. However, the LSI RAID adapter business, including its MegaRAID and 3ware storage controllers and software for direct-attached storage environments, will remain with LSI. The company also announced today that its board of directors has authorised a new stock repurchase program of up to $750m.

“NetApp will build upon the success of the Engenio storage platform and OEM business model to expand our total addressable market and extend our market reach,” says Tom Georgens, NetApp president and CEO. “We’re excited about the talented team that will join NetApp and the valuable OEM partner relationships we’re committed to supporting and making successful.”

On the significance of the deal, Simon Robinson, research director, storage at The 451 Group comments, “… though Engenio was profitable for LSI and brought in decent revenues, it was not nearly as profitable as its silicon products.

“For NetApp there are two areas where it should benefit; first, it gets more vertically integrated, allowing it to reduce its own costs going forward. Second, it gets to expand its own addressable market by moving into niche but fast growing areas such as video-driven storage and data warehousing.”

Robinson believes that there is also an impact for the wider OpenStorage market, “Many LSI/Engenio OEM partners such as Dell and Oracle are also NetApp rivals; they may decide to pursue alternative sourcing strategies, though that's not going to happen anytime soon.”

Evan Powell, CEO of Nexenta, a pioneer in OpenStorage software questions whether NetApp will continue to invest in LSI’s growing channel business which has been doubling year on year: “Or will they, as appears more likely, shut down this business in order to attempt to slow the growth of the OpenStorage channel?”

Powell is also surprised by the relatively low sale price, “Is it because of the loss of the IBM OEM, the oncoming end of hardware RAID, the threat from Intel, and the looming competition from much larger JBOD makers? As the market moves towards JBODs connected directly to the Intel CPU, did this threaten the on-going storage business? How else can one explain NetApp being able to pay a reported $480m for a reported $700m in revenues last year?”