Dell to Buy Nashua’s EqualLogic for $1.4 Billion—History’s Largest Cash Payout for a Venture-Backed Firm

11/5/07Follow @wroush

Nashua, NH-based EqualLogic, a fast-growing maker of network storage devices that was, until today, on the verge of going public, will instead be acquired by Dell Computer (NASDAQ: DELL) for an eyebrow-raising $1.4 billion in cash, the two companies announced today. The deal—to be completed sometime next year, subject to regulatory approval—would be the largest all-cash acquisition of a venture-backed company in history, according to VentureBeat.

Executives at EqualLogic were set to begin their IPO roadshow tomorrow, but decided at the last minute to accept the offer from Dell, according to Chris Baldwin, a partner at investor Charles River Ventures who helped to set up the company in 2001. “This was the management’s call,” says Baldwin. “If they had wanted to go for the IPO, I would have been delighted, and would have cheered for it. I’m delighted here as well.”

As well he should be. Dell’s $1.4 billion translates into an extremely handsome return on the $52 million that Charles River and its fellow investors—TD Capital Ventures, Focus Ventures, and Sigma—have put into the company over three investment rounds in 2001, 2003, and 2004. “It beats a sharp stick in the eye, and then some,” Baldwin jokes.

EqualLogic, founded in 2001 by Peter Hayden, Paul Koning, and Paula Long, is one of the leading makers of storage area networks (SANs) that communicate using the increasingly popular Internet Small Computer System Interface (iSCSI) standard. This means the company’s disk drives swap data in the form of Internet Protocol (IP) packets over cheap and ubiquitous Ethernet connections, in contrast to the more expensive “Fibre Channel” technology required by SANs from competitors such as EMC (NYSE: EMC).

“The founding premise and inspiration of the company from the start has been the magic of Ethernet and IP, which is plug-and-play—you hook up systems and they just work,” says Baldwin. “But for some very curious reason the world of Fibre Channel—the world of storage networks from Brocade and Emulex and EMC and HP and IBM—is very manually configured. It’s crusty stuff, and requires a lot of professional consulting. It’s hard to do, and it’s expensive. These three people had the courage to say, ‘Why? It doesn’t have to be.’”

EqualLogic’s plug-and-play premise has won a growing number of adherents. After earning $30 million in 2005 and $68 million in 2006, the company reported revenue for the first nine months of 2007 of $90 million, and has cleared its first profit.

Dell, which has been emphasizing the need for greater simplicity in corporate computing facilities as it diversifies from consumer desktop and laptop computers into the corporate server and storage business, said EqualLogic’s iSCSI technology would help it optimize its storage technology for virtualization—the trendy term for making a collection of servers or storage devices behave as if it were a single machine. (“What VMware does for servers, EqualLogic does for storage,” as Baldwin puts it.) Dell said that it would eventually incorporate EqualLogic’s technology into its PowerVault storage line. “Leading the iSCSI revolution will help Dell accelerate IT simplification and virtualization and will drive the Dell value proposition into more areas of the enterprise storage business,” chairman and CEO Michael Dell said in a statement.

“You could almost say that we designed this company for what Dell is trying to do,” says Baldwin. “We both see the same pain point. The alternative [to being acquired] was to start the IPO roadshow tomorrow, but Dell offered a very convincing story about why the management and the employees of EqualLogic would be better served if they executed their vision inside of Dell, because of the strength of their platform and the breadth of their operations.”

According to data from VentureSource published today by VentureBeat, Dell’s $1.4 billion payment will surpass Intel’s 2002 purchase price of $1.25 billion for Danish optical components company Giga ApS as the largest cash-only payout ever for a venture-backed firm. Other startup sales have brought higher sums—most recently, Google paid $1.65 billion for YouTube—but those deals involved stock or combinations of cash and stock.

Dell, in mid-afternoon trading on the NASDAQ exchange, was down less than 1 percent, to $29.80.

UPDATE 5:35 pm 11/05/07: I just spoke with EqualLogic chief marketing officer Tim Yeaton, and had a chance to ask him how people at the company were feeling about Dell’s stratospheric offer. At first, he talked very much with his executive hat on. “Every employee here is also a shareholder, and I think it was a strong validation of the shareholder value,” Yeaton said. But then—perhaps stepping back to think about how much money $1.4 billion really is?—he loosened up a bit. “At a visceral level, it makes people feel great about what they’ve accomplished. You could really say ‘Wow, we’ve built something amazing here.’”

Yeaton echoes Baldwin’s sentiment about the match between EqualLogic and Dell. “This company has a singular mission around driving storage simplication,” he says. “Similarly, Dell has a strategy to simplify corporate technology across the board. So you have this great alignment, and what a great opportunity to turbocharge our vision and accelerate it into the market.”

EqualLogic will remain in Nashua even after the acquisition is completed, Yeaton says. In a call to EqualLogic employees today, Michael Dell described the purchase as “a strategic acquisition, for the products, the brand, the channel, and the people” and said that he “anticipated continuing to invest here in Nashua,” according to Yeaton.

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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