NetApp Buys Decru

Network Appliance Inc. (Nasdaq: NTAP) has made another bid to break its NAS-only mold. It will pay $272 million in cash and stock to acquire Decru Inc., a maker of storage security appliances. The deal, comprising about 80 percent stock and 20 percent cash, is set to close by October 2005 (see NetApp Acquires Decru for $272M).

NetApp execs say the move will help the company extend beyond NAS. It follows NetApp's purchase of Alacritus, a VTL and CDP vendor, for $11 million and its multivendor program with Veritas Software Corp. (Nasdaq: VRTS). (See NetApp Annexes Alacritus and Veritas, NetApp Ship Multivendor Products.) NetApp's strategy, execs say, is to be a provider not just of NAS, but of data management and data protection in heterogeneous storage networks that include NAS, SAN, iSCSI, and tape storage.

To get there, NetApp doesn't mind paying the relatively high pricetag to acquire the startup. "This is an expensive acquisition, but we think it's justified," said NetApp CEO Dan Warmenhoven on a conference call this morning. He said NetApp couldn't find a technology better than Decru's when it scouted the market. "We think they have at least a two-year headstart. We didn't see a clear number two."

Decru competes in the security appliance market with vendors like Kasten Chase Applied Research Ltd., NeoScale Systems Inc., and Vormetric Inc. Its DataFort devices encrypt data and add key management for data "at rest" behind firewalls. By doing this, Decru claims it can eliminate roughly 50 to 80 percent of all security threats, which come from inside an organization and aren't screened out by firewalls and other network security gear.

Decru has about 100 customers, most within the U.S. government. Decru has partnered with NetApp in the U.S. Department of Defense, and execs say it's grown from $6 million in revenue last year to a projected $35 million in revenue this year.Decru gets about one fifth of its revenue from NetApp and a significant chunk of the rest from partnerships with EMC Corp. (NYSE: EMC), IBM Corp. (NYSE: IBM), Storage Technology Corp. (StorageTek) (NYSE: STK), and others.

Whether NetApp can keep these resellers happy is open to question. "Do you really think EMC sales reps will push Decru now that it's part of a major competitor?" asked one analyst on today's call. Warmenhoven responded that partnerships with competitors are already a feature of the storage networking business.

NetApp will not integrate Decru's security appliances with its own devices -- though it's not ruling out the possibility of tapping Decru's technologies later on. For now, though, the NAS vendor will stay out of Decru's way. Decru will be an independent business within NetApp. It will be headed by Decru's CEO Dan Avida, and 73 Decru employees, presently based in Redwood City, Calif., will join NetApp, which is based in Sunnyvale, Calif.

On the financial side, NetApp execs project Decru will show $8 million, $9 million, and $10 million in revenue over the next three quarters, though the acquisition will be dilutive to NetApp earnings by about one-quarter of a cent per share. By the fourth quarter after the acquisition, Decru will be accretive to NetApp earnings, execs say.

The announcement comes in the wake of recent lost data scandals and a slew of storage-plus-security announcements (see Disuk Launches SafeTape and Compliance Calls for Security). It also follows days after Decru and NetApp unveiled CardVault, a joint solution to help small and medium-sized companies meet mandates for payment card industry (PCI) security standards (see NetApp, Decru Serve PCI Combo ).NetApp vows to keep its acquisition plan going, but execs refuse to be specific about what they're considering. Companies with commercially viable technology, which are leading their market niches and which have solid engineering teams, are being considered. But who, when, where, and how are on the QT. "Rate and frequency is something I just can't speculate on," Warmenhoven said.

Mary Jander, Site Editor, Byte and Switch