January 23, 2017
Rumors had been flying for some time about SimpliVity needing additional funding, and that HPE had made an offer that was unacceptably low at $650 Million. Clearly, these were more than casually well-informed rumors, since HPE announced on January 17 that it would be acquiring SimpliVity for $650 Million in cash. Was this a fair price? That is hard to say. Since I’m not really an equity analyst, I will spend no more time on this other than to say that it is far short of the kinds of valuations that the industry was expecting. Competitor Nutanix’s current market capitalization is slightly over $4B, which is more than a bit rich for such a company. Despite its high growth rates, it has yet to turn a profit.
But pricing aside, was it a smart move for HPE? Absolutely. It’s probably the smartest acquisition that HPE has done in its entire history, and certainly one that helps shatter the perception that HPE always overpays for its acquisitions, even when they are strategically sound. SimpliVity was essentially tied for first place in our recent Forrester’s recent Wave™ report on Hyperconverged Infrastructure Solutions, coming in substantially stronger than HPE’s own HC380 product.
The fit with HPE for SimpliVity’s solution is impressive because:
- SimpliVity has a strong presence across both enterprise and SMB segments, with an already strong world-wide channel program that HPE can use to bootstrap its own channel integration.
- SimpliVity’s product has a very rich set of storage functions which will be attractive to many of the same people who have been early prospects for the HC380 as well as some of the legacy customers for HPE StoreVirtual, from which the HC380 is derived.
- SimpliVity has no direct sales channel of any size today, and a rapid ramp of HPE’s direct channel should propel the SimpliVity product into strong contention for leadership in volume and revenues within the first 12 – 18 months of shipments under the HPE brand.
With SimpliVity, HPE now has a modern leading-edge HCI solution that can work with current mainstream hardware products as well as its flagship composable infrastructure solutions. HPE faces potential competition from multiple startups as well as Dell Technologies (both in the form of VMware VSAN software and the integrated VxRAIL appliances and ScaleIO), Cisco, Lenovo and Huawei. It desperately needed something with a better fit than the more than a decade-old StoreVirtual architecture acquired in 2009 from Left Hand Networks.
So, HPE benefits, and SimpliVity benefits, with the possible exception of some disgruntled late stage investors. Who loses? Pretty much the whole spectrum of competing hyperconverged solution vendors. The biggest and most immediate loser is Huawei, which in December 2016 announced a high-profile alliance with SimpliVity to resell SimpliVity OmniStack on Huawei hardware. I suspect this deal is effectively dead, even though the contract may technically be still in effect. Lenovo will probably be less immediately effected since it has a rich portfolio of SimpliVity competitors as partners which it resells in conjunction with it's line of hyperconverged hardware SKUs. Another big impact will be on the established leaders in the HCI space, Nutanix and VMware VSAN along with VMware’s direct channel partners, particularly Dell Technologies VxRAIL. In combination, the Nutanix and VMware ecosystems probably account for somewhere around 75% of the HCI shipment volume. Cisco also comes under some stress. SimpliVity was a strong revenue generator with sales of its OmniStack offering on Cisco UCS, apparently outselling Cisco’s own HyperFlex version.
Life will be particularly intersting for Nutanix, but not solely because one of its key competitors is suddenly backed by the largest sales and marketing engine in the enterprise computing space. This factor itself is probably not a serious short-term threat because HPE has traditionally taken a long time (in startup terms) to get acqusitions integated into its sales process, rather the fact that the HPE deal immediately frees one of the most credible Nutanix competitors from concerns about financial viability or breadth of support. But long term it is never good to have the largest player ina segment suddenly bootstrap their competive offering to effective technical parity. And for Nutanix, even the slightest hiccup in its growth trajectory may have dramatic effects on its equity valuations, which would be stressful but not fatal.
For the host of smaller competitors, life just got somewhat more difficult as well. And for the current HPE StoreVirtual and HC380 team, life just got ugly – I find it hard to believe that HPE will – despite protestations to the contrary – continue to invest in the HC380 beyond what is needed to keep StoreVirtual as a revenue generator. It remains a valuable revenue generator with a large installed base, but will certainly not be the center of hyperconverged thought or investment going forward.
Are there any pitfalls? On the technology side, there is essentially zero downside. SimpliVity OmniStack is one of the leading hyperconverged solution stacks by any measure, and now it is going to be integrated into one of the largest sales and delivery engines in the industry. So what could go wrong? It is not clear how agile HPE will be in managing this ingestion. From personal experience, I know how daunting HPE’s internal processes can be. Its ability to integrate the SimpliVity team without damaging its core engineering resources is not a given. Its ability to maintain the necessary agility to keep pace also comes into question, with what is a rapidly evolving solution area.
My summary take – this is a superb move on HPE’s part. If you are thinking of buying a hyperconverged solution, HPE just jumped into the “must evaluate” bucket.