Xyratex Gobbles nStor

Storage subystem maker Xyratex Ltd. (Nasdaq: XRTX) today announced plans to buy nStor Technologies Inc. (Amex: NSO), which makes controllers and software, for about $21.2 million in cash and stock (see Xyratex Acquires nStor).

Xyratex's CEO, Steve Barber, claims the deal will help his firm build better low-end RAID controllers, while adding new customers. The enthusiasm is echoed by Todd Gresham, CEO of nStor. "We're looking at a significant high-growth opportunity," Gresham says.

The entry-level RAID market, comprising low-end RAID controllers, software, power packaging, and cooling gear that wind up in systems selling for $15,000 or less, is about to explode, Gresham asserts. He says $1.9 billion in worldwide revenue in 2005 will grow to over $6 billion by 2008.

Xyratex and nStor can't let their integration distract from the opportunity. A plan will be in place within the next month, Gresham says. Separately, an nStor spokesperson says Gresham, a longtime storage networking honcho who has worked at EMC Corp. (NYSE: EMC) and sits on the board of GlassHouse Technologies Inc., will likely stay on board. But nothing has been announced. The deal is set to close this fall.

The news amplifies Xyratex's scrappy bid for self-determination, which has taken it down pathways other suppliers might fear to tread. The first turn came in June 2004, when Xyratex became the only storage vendor in two years to go public (see Xyratex Swims in Public Pool). Then earlier this year, the company released its own controller in an effort to doff suppliers who had become competitors (see Xyratex Branches Out).Now, Xyratex seeks consolidation with a small but moderately successful fellow controller maker who offers a few things Xyratex doesn't.

"We have put all of our recent focus on our 2U platform, and Xyratex today has a 3U platform with sizeable traction and a 4U product," says nStor's Gresham. Putting all this together should round things out for OEMs with an eye on the SMB and midrange market.

nStor is the first buy Xyratex has made to beef up its controller position. But there have been other acquisitions, most aimed at improving Xyratex's ability to manufacture its own products. These include the $29 million purchase of ZT Automation, a disk drive production process gear specialist, in February 2004; the purchase of Beyond3, which makes optical inspection systems, for $18.5 million in September 2004; and the $17.2 million purchase of Oliver Design, which makes disk drive cleaners, in May 2005.

Xyratex can boast Network Appliance Inc. (Nasdaq: NTAP), Seagate Technology Inc. (NYSE: STX), and Western Digital Corp. (NYSE: WDC) as its biggest OEM customers. But that may not last: Yesterday, rival Dot Hill Systems Corp. (Nasdaq: HILL) announced a major development deal with NetApp, which some analysts say could stunt growth of NetApp revenues at Xyratex.

nStor doesn't name its customers, but Gresham claims they accounted for $10 million in revenue last year, and he says there is "minimal" overlap with Xyratex's base.The two may do better together than apart, depending on how smoothly the integration goes. The subsystem market is a tough one, in which a few key players struggle to maintain a foothold. Xyratex has delivered solid financials, showing revenues of $169.6 million and growth of 56.9 percent sequentially, in its latest quarterly report (see Xyratex Reports Q2). Others, including Dot Hill and Engenio Information Technologies Inc., are also holding their own (see LSI Logic Reports Q2 and Dot Hill Reports Q2).

Meanwhile, Adaptec Inc. (Nasdaq: ADPT) has had a rough go of late (see Adaptec Agonistes). And nStor itself has always been a mixed bag (see nStor Reports Q1 Results).

At least one analyst is scratching his head. "It may be a small positive," muses Steve Berg of Punk Ziegel & Co. "nStor may have been creeping along, not really growing that fast. Maybe a bigger company and access to more clients will help them grow faster."

At press time, Xyratex shares were trading at $16.92, down $0.60 (3.42%). Shares of nStor were trading at $0.11, down $0.04 (26.67%).

Mary Jander, Site Editor, Byte and Switch0