Five Questions on NetApp’s Acquisition of LSI Engenio

Congratulations to LSI for this transaction. There has been talk about them wanting to exit the relatively low margin storage hardware business in order to allow the market to recognize the value of their chips business. Their channel team in particular has done an amazing job building that line of business in a short period of time.

Here are a few questions to ask:

1. Will NetApp 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?

2. What role did IBM play in all of this? They are apparently shifting away from both their OEM of NetApp’s aging filer and of course are shifting away from their OEM of LSI’s SAN products towards their XIV line

3. Now that Intel has announced that their next generation architecture will support SAS directly, does this mean that LSI’s SAS chip business (which they are holding onto) and their HBA business (which NetApp appears to be buying) are doomed? Update – sounds like they are NOT buying the HBA business, which makes the entire transaction a non event for the OpenStorage channel.

4. Why did LSI get such a low multiple on this purchase? 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 ongoing storage business?  How else can one explain NetApp being able to pay a reported $480 million for a reported $750 million in revenues last year.

5. Assuming NetApp does not shut down the line of business, how will NetApp do at selling arrays that compete purely on price / performance and quality without the vendor lock-in of their legacy NAS solutions? Related to that, what percentage of customer sales for NetApp come from customers that are locked into their products and are forced to pay outrageous costs to continue their NetApp relationship?  Could this antediluvian business model help explain NetApp’s recent announcement of record gross margins?