Network Engines Buys Alliance Systems for $40M

A company that made $96 million in 2006 by OEMing server appliances to EMC is on the boil again.

Network Engines, which ceased selling HBAs for storage suppliers in 2004 in order to pursue life as a storage and security appliance OEM, has shelled out $40 million in cash and stock to buy Alliance Systems, a profitable Texas-based maker of server appliances, also for OEMs.

The deal has been approved by the board of publicly held Network Engines and by shareholders of privately held Alliance, whose revenues in 2006 were $102 million. The sale is expected to close within a week, comprising $35 million in cash and nearly $5 million in stock.

After the close, Network Engines will retain its company name, but add about $100 million to quarter revenues from Alliance (immediately accretive to Network Engines on a non-GAAP basis) and about 130 employees in Plano, Texas. Network Engines already has 150 employees in Canton, Mass.

The Alliance executive team will be folded into Network Engines under the leadership of Network Engines' current CEO, Greg Shortell, who was appointed in January 2006.The merger is significant on a few counts. First, it brings a key EMC supplier into what could be a better position. While Network Engines also has several other high-profile partners, including Availl, Borderware, Juniper, Nortel, and SurfControl, its heavy reliance on EMC is risky from an investor standpoint.

Besides supplying EMC with storage appliances [at press time, specifics were forthcoming], the vendor also makes specialized security appliances for EMC's RSA division -- a situation that came about after EMC purchased Network Intelligence, a Network Engines OEM, for $175 million in September 2006. With these arrangements, Network Engines relies on EMC for more than 80 percent of its revenues. (See Network Engines Reports Q3.)

Alliance, once profiled by Byte and Switch as a user of ONStor NAS gateways and an assortment of SAN gear, sells its server appliances to over 250 OEM customers and counts among its partners Dot Hill, HP, and Microsoft. So this deal offsets Network Engines' one-sided qualities.

The agreement also presents intriguing appliance possibilities for suppliers. "Alliance Systems' strong position in telecommunications complements Network Engines' expertise in storage and security," said Shortell in a statement this morning. "These markets are experiencing a convergence of technologies, which creates new applications."

Examples of segments now open to Network Engines include video, VOIP, and multimedia, for which Alliance builds servers for telecom providers.The potential downside? Integration problems, particularly given the geographic distance between Texas and Massachusetts. That aside, market reaction to the deal seemed positive this afternoon, with shares of Network Engines trading at $2.11, up $0.14 (7.31%).

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