Dell-Compellent Deal Shows the Sky's the Limit for Cloud Computing M&A

 |  Includes: CML, DELL
by: Money Morning
In an indication of how far cloud computing has come - and more importantly where it's headed - tech companies have committed some $5 billion to cloud-related mergers and acquisitions (M&A) since mid-April.

Dell Inc. (Nasdaq: DELL) on Monday made the latest move - snatching up data storage company Compellent Technologies, Inc. (NYSE: CML) for $960 million in cash. The acquisition will help Dell expand its offerings of data-center products - cloud computing.

Cloud-computing effectively lets companies outsource information technology (IT) services. The cost of storing data and software, or even billing and payment processes are pushed onto the cloud provider - a separate company that goes through the trouble of securing all of that information.

Cloud computing may be a relatively new concept for retail consumers, but the truth is tech companies and cutting edge businesses have long anticipated its ascension to the mainstream. In fact, the world's biggest tech giants have been vying for the top spot in the fledgling market for years.

Dell in August lost a pricey bidding war to Hewlett-Packard Company (NYSE:HPQ) for 3Par Inc.

H-P emerged from the fray with the data storage company for $2.4 billion, following up on similar acquisitions the company made in 2007 and 2008.

In July 2007, H-P bought Opsware Inc., a data center automation startup for $1.6 billion, or 16-times that company's 2006 revenue. Earlier this year the computer maker acquired 3Com Corp., a networking-gear maker, for $2.7 billion. And most recently, the company in September acquired ArcSight Inc.(Nasdaq:ARST) for $1.5 billion in cash. ArcSight makes security software that identifies suspicious activity on corporate networks, which will help keep information in H-P's cloud secure.

Some analysts believe that H-P was overly generous, but the company's willingness to splurge shows just how far tech companies are willing to go to gain an edge in this fledgling market. In fact, Dell - which has bought out or partnered with five cloud companies in the past year - is right on H-P's heels.

Dell-Compellent Deal Shows the Sky is the Limit for Cloud-Computing MA

Dell acquired EqualLogic Inc. in 2007 for $1.4 billion as the foundation for its data-storage product, and in August agreed to buy storage company Ocarina Networks and server-computer maker Scalent Systems Inc.

Dell currently is the fifth-largest data storage provider worldwide, by revenues, behind EMC Corp. (NYSE:EMC), International Business Machines Corp. (NYSE:IBM), NetApp Inc. (Nasdaq: NTAP), and H-P,according to IDC Worldwide Disk Storage Systems Quarterly Tracker.

However, Dell has paid considerably less for its acquisitions than its competitors have.

Dell's deal is valued at about four-times Compellent's forward sale estimates, according to Bank of America Merrill Lynch, while H-P's purchase of 3PAR valued the company a multiple of 10-times forward sales. EMC's purchase of Isilon Systems Inc. (Nasdaq:ISLN) was at 8-9-times forward sales, BofA Merrill Lynch says.

Global sales of cloud services will rise 17% this year, to $68.3 billion from $58.6 billion in 2009, according to the research firm Gartner, Inc. (NYSE:IT). And sales are poised nearly to double by 2012, to $102.1 billion, which explains why tech companies are so willing to dispense with cash.

Two other potential takeover targets include:

  • Zuora: Zuora offers online services to manage and automate customer subscriptions and payments. The company was founded by Tien Tzuo, who cut his teeth at - a pioneer in the cloud-computing industry. Zuora's flagship product, Z-Billing, has attracted over 100 customers since its launch in May 2008, according to the company's Web site, and reportedly signed over $1 billion in contracted subscription revenue in the first quarter of its new fiscal year, which ended April 30. Zuora also saw 102% growth in revenue, 127% growth in organic cash flow and was cash flow positive for the quarter.
  • Nimbula: Nimbula is a cloud infrastructure and services system that was founded by the same team that developed Amazon's (NASDAQ:AMZN) EC2 public cloud service. The company has raised more than $20 million in funding.

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