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Originally published November 15, 2010 at 11:55 AM | Page modified November 16, 2010 at 9:36 AM

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EMC to buy Isilon for $2.25B

Data-storage company EMC is buying Isilon, a Seattle company that builds systems to manage large amounts of data, for $2.25 billion.

Seattle Times technology reporter

The data-storage market has become a hunting ground recently for corporate acquisitions, and a Seattle company has become the latest prize.

Isilon, which builds systems to manage large amounts of data, was acquired Monday by storage giant EMC in a $2.25 billion deal.

EMC, based in Hopkinton, Mass., will pay $33.85 in cash per share of Isilon.

The sale comes in the wake of a duel between Dell and Hewlett-Packard over the purchase of 3Par, a fight HP ultimately won in September. That same month, IBM bought Netezza.

The major hardware companies are seeking to add data-storage products and services for cloud computing, where businesses access storage and computing power from remote data centers.

"The evolution of cloud computing, you require storage, you require servers and you require network. To play in that market you need all those parts," said Rajesh Ghai, analyst at ThinkEquity. "With data storage, there are small companies that were doing interesting stuff."

Isilon's software and hardware systems, also called "scale-out network-attached storage," help companies manage large amounts of data, such as gene sequencing and online video streaming.

The systems are designed so they can start small but expand to accommodate up to 10 petabytes of data.

Kodak, Sony, ABC, NBC and Merck are Isilon customers.

The merger "enables us to bring that access together in a way that enables [us] to accelerate our innovation, our R&D [research and development], build on our customers and enables us access to a better business platform," said Isilon co-founder and CEO Sujal Patel.

Isilon, which has 500 employees, will remain in Seattle, and Patel expects the company to grow more aggressively.

Joe Tucci, chairman and CEO of EMC, said the demand for Isilon's storage is growing.

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"The unmistakable waves of cloud computing and 'Big Data' are upon us," he said in a statement.

"Customers are looking for new ways to store, protect, secure and add intelligence to the vast amounts of information they will accumulate over the next decade."

ThinkEquity's Ghai said, "You had a perfect storm of large companies on one side and a lot of cash on their balance sheet, these companies being HP, EMC, IBM and Dell.

"On the other hand, you have these smaller companies in niches which are fast growing. If you are a company like that, you will ultimately attract attention," he said.

Ghai, who rated the stock a buy last year when it was at $4.50, said Isilon was "the best call of my career."

Isilon was founded in 2001 and went public in 2006, raising $108 million. Its original investors included Seattle's Madrona Venture Group.

Matt McIlwain, an Isilon board member and Madrona managing director, said it will be a 15-fold return for Madrona's investors, who have put $15 million into the company.

Isilon's first year as a public company was rocky, and CEO Steve Goldman and Chief Financial Officer Stuart Fuhlendorf left in 2007 in a corporate reorganization.

Patel, the chief technology officer, became CEO at that time.

The Securities and Exchange Commission began an investigation of the company at the end of 2007 over inflated sales numbers in 2006.

Isilon agreed to a settlement without financial penalties last year and agreed to a permanent injunction against future violations of securities law.

The commission also charged Fuhlendorf with violation of securities law. That case is headed to trial April 11, said Fuhlendorf's attorney Peter Ehrlichman of Dorsey & Whitney.

The company's stock fell below $2 a share in March 2009.

Early this year, Isilon reported its first profitable quarter as a public company. In the most recent quarter, ended Sept. 30, it saw $4 million profit on $54 million in sales.

The sales figure represented 77 percent growth compared with the same period a year ago.

EMC does not expect the acquisition to change its financial projections for 2010, but said Monday it expects Isilon sales to grow to $1 billion a year in 2012.

Isilon's stock closed at $33.87, up 28.5 percent from $26.29.

Shares of EMC closed at $21.45, down 27 cents.

"This is a great example of what I call the virtuous cycle of innovation here in the Pacific Northwest," Madrona's McIlwain said.

Patel started Isilon with Paul Mikesell after both worked at Seattle-based RealNetworks.

"This is a very positive trend to be able to have a continuous cycle of very talented people who are attracted to the Seattle area to build the next generation of leading technology companies," McIlwain said.

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com

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