Dell announced the acquisition of EqualLogic tonight for a pittance… $1.4 billion. The storage virtualization vendor is the biggest acquisition in Dell history:
Under the terms of the agreement, Dell will purchase EqualLogic for approximately $1.4 billion in cash. The acquisition of EqualLogic is expected to close late in the fourth quarter of Dell’s fiscal year 2008 or early in the first quarter of fiscal 2009. The company expects the acquisition to be dilutive to earnings per share, excluding the amortization of intangibles, by $0.02 to $0.05 in aggregate for Fiscal 2009 and Fiscal 2010. The acquisition has been approved by the board of directors of each company and is subject to regulatory approvals and customary closing conditions.
EqualLogic was planning on going public and according to their filing they only made $68 million in revenue last year. That’s a purchase price of 21 times revenue. It’s also been a good year for acquire-es in open source business with a 50-500x acquistion of Xensource and a 60x revenue acquisition of Zimbra . However, it’s amazing to me that we can see so many acquisitions at 20x revenue and up. Maybe it’s my background as a financial guy that makes me go…hmmm.
As I look at these acquisitions I wonder over what time period they will be considered success. If you use a multiplier of 10X revenue for that business that was acquired (which is still generous) that means Dell would have to realize at $140 million in revenue from EqualLogic to recoup their investment in increased stock valuation (which would be diluted in their hardware-centric business so even then it’s not a great measurement). That would mean Citrix would have to realize $50 million in direct revenue from Xensource and Yahoo! would need $38 million from Zimbra. Maybe you would have to wait until that business threw-off revenue to recoup the purchase price as the measure of success which would take even longer.
I can see EqualLogic enabled by the Dell channel seeing the quickest ROI but I have to wonder over what period we will see Xensource and Zimbra pay-off. On the other side maybe that’s the only way software behemoths can grow and in their case it might be worth it. Food for thought.
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