Wednesday, January 20, 2016

Should Cisco Buy NetApp?

Right now NetApp is worth only $6.9 Billion! With a recession likely in 2016, the market valuation of NetApp will only go lower, making it a good target for acquisition.

As a stand alone Data Storage vendor, NetApp is at cross roads. The revenue from its traditional data storage array is falling at double digit rates. Its main competition - EMC is going private via acquisition by Dell. Hard Disk based data storage devices are in their twilight years - which is the main stay for NetApp.

In short, the future does not look bright for NetApp as an independent publicly traded company. Any investor can buy out NetApp and milk out the cash from business. At $6 Billion valuation, NetApp is primed for a takeover.

Across the silicon valley is Cisco. 2015 had been a very good year to Cisco. The sales of its UCS blade servers has propelled Cisco into becoming 4th largest server vendor. Though Cisco, along with EMC created VCE - which is a market leader in converged infrastructure, Cisco faces severe head winds in its core business. Adding to the business challenge, Cisco exited VCE business venture and EMC is being bought over by DELL. The Flexpod product line is also seeing strong head winds by new types of hyper converged infrastructure - Nutanix, Simiplivity and others.

At this juncture, it makes business sense for Cisco to buy a storage vendor will add teeth to its UCS server business and compete aggressively in converged infrastructure markets. With NetApp buying SolidFire - an all Flash storage vendor can help Cisco position UCS better in market.

Cisco is also at cross roads

In 2016, Cisco will have to decide if it wants to remain as an equipment provider or become a Cloud Service provider and remain as center of IT world.

For a long time, Cisco has served as a bell weather for the IT industry. Cisco provided the key networking devices which enabled the Internet and eCommerce world.

Now, with Cloud Service providers such as AWS, Microsoft Azure, Google etc., - the need to build enterprise scale data centers is becoming less important. Many companies are embracing  cloud service providers for all their IT infrastructure and are not building data centers. To Cisco's discomfort, the leading cloud service providers are not buying Cisco gear!

The cloud service providers are fundamentally challenging Cisco's business model.

So the question is: Should Cisco buy NetApp?

Cisco can buy a storage vendor and integrate its UCS with a data storage & its ACI enabled Nexus range of switches. This will enable Cisco to offer end-to-end solution for datacenters.

In my opinion, (its my opinion and it in no way reflects EMC's opinion) Cisco must buy a storage vendor - but not a standalone pure storage vendor like NetApp. Buying NetApp would be a retrograde move in terms of technology, as it does not give any technological benefit to Cisco. Just doing an integration between UCS servers and NetApp storage system does not add value to its customers.

Instead, Cisco should look ahead and buy companies that can truly add technological advantage to its servers. Cisco did buy Whiptail - a server flash storage vendor, but the integration did not go well.

Ideally, Cisco should buyout new technology company which can provide:

1. Ultra Fast Server Flash Storage, which will make its servers blazing fast.
2. OpenStack distribution for server virtulization and server attached commodity storage
3. Hadoop & BigData tools company which can run on UCS+FlashStorage+OpenStack
4. Cloud Service Provider

NetApp does not bring any new technology to Cisco's armory. Cisco currently gets the same technology from NetApp via partnerships.

So, Cisco should look at acquiring new & emerging technology companies that can help redefine UCS Servers as a hyper converged infrastructure. Something like ScaleIO or Nutanix - but can do more than just storage.

Historically, Cisco has been very good at buying technology companies which are developing new, promising technologies and nurturing them into major sellers. For example, UCS, Nexus, ACI, Meraki - were all in startup phase when Cisco acquired them.

Cisco needs to choose if it wants to remain as a major vendor of enterprise IT. And if Cisco wants to remain as a major vendor of enterprise IT, it must become a cloud service provider.

Finally, My Answer

Buying NetApp will be a good financial decision. NetApp can generate far more cash than its current net worth. So from a pure financial transaction point of view, buying NetApp will add financial value to Cisco's shareholders.

From technology point of view, buying NetApp is like buying 2000 model car in 2016! NetApp does not give Cisco any technological advantage and will not help Cisco transform its equipment business. Acquiring a older technology and spending time/energy to integrate it with it business will not help Cisco build a new generation technology.

In short, Cisco can buy NetApp for the financial value - but not for the technology. Ideally, if Cisco buys NetApp, Cisco must continue to run NetApp as a separate business entity and not merge it with its core server or network business.