California-based LSI designs, develops and markets complex high-performance semiconductors and storage systems. Its technology provides storage capacity, speed, reliability and power saving to users. LSI reports revenues in two segments –– Semiconductors and Storage Systems.
The external storage systems business of LSI Corp. develops and delivers Engenio product suites. Engenio specializes in bandwidth intensive storage. As of now, NetApp specializes in providing virtualized IT infrastructure. With Engenio, NetApp will now be able to address the video storage market, as well as high performance computing applications like genomics sequencing.
The Engenio business unit will be integrated into NetApp’s business functions and sales teams of both companies will join hands to maximize opportunities in the storage vertical. The combined entity will significantly expand NetApp’s addressable market and generate higher revenue. The company expects the deal to be accretive to GAAP and non-GAAP earnings per share by the second quarter of 2012.
Apart from the above, the acquisition will make NetApp an original equipment manufacturer (OEM) for external storage devices. Moreover, the company has been able to strengthen its OEM relationship with tech giant International Business Machines Inc. (IBM), as it has remained a significant OEM for LSI’s Engenio. NetApp itself shares 6 years of OEM relationship with IBM.
However, there are some risks that are keeping analysts on the sidelines. As the deal is one of the largest in the history of NetApp, integration of the Engenio business could take some time. On the other hand, gross margin for the Engenio business is much lower than that of NetApp’s. Hence, margins could contract over the coming quarters.
But we are optimistic on the deal, as NetApp will gain share in the storage market, which is seeing increasing consolidation now-a-days. The recent acquisitions of storage vendors by Dell Inc. (DELL), EMC Corp. (EMC) and Western Digital Corp. (WDC) are indicative of the growing importance of storage technology in a market moving toward cloud computing and virtualization.
Currently, NetApp has a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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