When Hewlett Packard Enterprise Co. announced Tuesday that it’s acquiring SimpliVity Corp. for $650 million, the surprisingly low price raised questions about whether the hot market for systems that combine computing, storage and networking into one box was cooling off. After all, the maker of so-called hyperconverged systems was reported just last November to be talking with HPE about a $3.9 billion buyout.

As it turns out, the growth of the market wasn’t the problem. It’s that there are simply too many big fish in the pond.

SimpliVity had raised more than $275 million from a blue-chip roster of investors that included Accel Partners and Kleiner Perkins Caufield & Byers. The company was valued at more than $1 billion after its most recent funding round of $175 million in 2015.

But estimated values don’t matter much if there aren’t any buyers. The weak market for initial public offerings that began in late 2015 – combined with consolidation in the market – left SimpliVity with dwindling exit options.

One factor was the recent disappointing performance of Nutanix Inc., considered the upstart leader in the hyperconverged infrastructure segment, short-handed as HCI. After leaping to nearly $45 per share shortly after its initial public offering in October, Nutanix stock has languished below $30 since December. Other recent tech IPOs have fared similarly. Despite some bullish predictions last fall, the rally in tech IPOs has yet to materialize and an uncertain economy and an unpredictable new U.S. president have many companies on the sidelines.

SimpliVity was also hurt by Dell’s acquisition of EMC Corp. last fall. Although SimpliVity continued to sell its software on Dell platforms, the deal essentially put SimpliVity in competition with its largest hardware partner.

It didn’t look that way at the time. “These companies are going to be very busy integrating these very large businesses,” SimpliVity Chief Executive Doron Kempel told The Channel Co. shortly after the Dell-EMC deal was announced in late 2015. “There’s less innovation, there’s distraction and when we work with the VARs, we’re going to tell them that this is a great opportunity for [them] to start working with SimpliVity.” The sale to HPE barely four months after the EMC acquisition closed would indicate that the distraction dividend failed to materialize.

On the contrary, “Dell is the top of the HCI marketplace,” Stu Miniman, a senior Wikibon analyst, said in an interview today on theCUBE, SiliconANGLE’s video studio. Its hyperconverged holdings include VMware Inc.’s vSAN and VxRail as well as ScaleIO, a scalable software-defined storage solution. Dell is also an original equipment manufacturer for SimpliVity rival Nutanix, as well as for SimpliVity itself. “Hyperconverged was one of the top reasons Michael Dell wanted EMC,” Miniman said.

No slowdown here

Growth prospects in the HCI market continue to look robust. International Data Corp. has not backed off on its projection that the market will grow 25 percent annually, to nearly $6 billion, by 2020. “I don’t think SimpliVity’s valuation suggests that the greater hyper-converged market is flattening,” said Charles King, president and principal analyst at Pund-IT Inc. “It is common in leading-edge business software for the market to coalesce around particular platforms, leaving secondary players with less attractive prospects.”

Nutanix and Dell clearly have pole positions, even if Nutanix’s stock price has underwhelmed, King said. “That makes it increasingly tough for independent competitors like SimpliVity to get much traction.”

The good news for SimpliVity as a company is that HPE’s deep pockets will give it the investment dollars that were becoming increasingly scarce in the venture markets. HPE has already committed to selling ProLiant Servers running SimpliVity software in the second half of the year. “HPE needed to energize its hyper-convergence offerings,” Miniman said. “This will help.”

HPE would like to see a repeat of the success it had with 3PAR Inc., the data storage company it acquired in 2010 after a bidding war with Dell. 3PAR technology has become the core of HPE’s storage strategy, and it’s widely considered to be one of HPE’s smartest purchases.

It’s in HP’s interest to move quickly, since SimpliVity is likely to encounter some headwinds during the transition. “If I’m looking at buying a Lenovo, Cisco or Dell server running SimpliVity, do I really want to sign up knowing that the strong push will soon be on ProLiant?” Miniman asked.

The deal may also signal open season on other second-tier players in hyper-conversions, including Maxta Inc, Diamanti Inc., Springpath Inc and Stratoscale Ltd. With only a handful of major server players left, their options – and valuations – will be limited.

Watch the full interview with Stu Miniman here:

Image courtesy of SimpliVity