In my previous post, I discussed why I thought that NetApp’s acquisition of Engenio was a difficult one and why I question the value of the combined entity.  Simply put, there seems to be redundancy in the product line and it makes you wonder how a merged company creates substantial new value.  However, there is another angle that could help explain the move and can be simply explained in three letters – IBM.

NetApp has an existing relationship with IBM where IBM OEMs NetApp filers for their “N-Series” product line.  These products are virtually the same as what you can buy from NetApp directly.  However, the big difference is that they can be sold, quoted and supported by IBM.  IBM does have their own higher end NAS products called SONAS, but the N-series is still an important part of the IBM portfolio.  Clearly this relationship is an important one for both companies.

Engenio is also an important part of IBM’s portfolio since IBM uses Engenio for the DS4000 and DS5000 mid-range disk products.  Like the N-Series, these products are created by Engenio although IBM takes a more active role in customizing these platforms.  Like NetApp, this relationship is an important for IBM since these solutions directly address the mid-market space.

There is an interesting similarity here.  We have two companies both of which have important relationships with IBM joining forces.  If you are IBM, you probably view this as a mixed blessing.  Clearly, post-merger, IBM can feel good about the improved consistency and longevity of two key suppliers, but Netapp/Engenio will also have greater negotiating leverage which could impact product costs and profitability.  At the same time, if IBM were considering an acquisition, the combination of NetApp and Engenio would be more interesting than either company alone.

From a NetApp perspective, the merger with Engenio strengthens their relationship with IBM and brings a new family of block-based storage systems.  However, I believe that it also enhances their value as an acquisition target.  It is obvious why IBM would want to acquire them, but third party Engenio OEMs could be interested as well.  These companies have already invested in Engenio technology and acquiring a combined NetApp and Engenio would instantly provide a credible storage portfolio with a broad range of products.

The combination of Engenio and NetApp may create technical challenges due to the need to support multiple controller technologies, but I believe that the combined entity enhances NetApp’s position as a possible M&A target.  IBM would be a natural player, but the other Engenio OEMs would be interested as well.

[Cross-posted at About Restore]