HPE Buys its Way Up-Market in Hyperconverged Systems

By Charles King, Pund-IT, Inc.  January 25, 2017

HPE’s announced plan to acquire SimpliVity for $650M says interesting things about the state of both HPE and the market for software-defined, hyperconverged infrastructure solutions.

There are certainly good business reasons to pursue such a deal. As HPE noted in its announcement, the hyperconverged market (estimated to be approximately $2.4 billion in 2016) is projected to grow at a compound annual growth rate of 25 percent, to nearly $6 billion, by 2020.

Compare that to the recent single-digit gains in volume sold and flat or declining revenues in overall general purpose server sales, and you can see why HPE believes SimpliVity should help buoy up its bottom line.

However, the deal also underscores competitive challenges facing both HPE and SimpliVity in the hyperconverged market. In the former case, HPE has done pretty well in terms of share, at least until Dell completed its acquisition of EMC. That gave the combined Dell EMC a substantial overall lead in converged and hyperconverged sales.

Similarly, though SimpliVity has fared well in competitive market studies, including Gartner’s hyperconverged Magic Quadrant, its competitor Nutanix has generated more headlines and positive reviews. In fact, after the HPE deal was revealed, serious questions arose about the acquisition purchase price, which was just 2.5X SimpliVity’s funding (or about half the average for similar start-ups), and significantly below the company’s estimated $1B+ value from just a few months ago.

Rather than indicating that something is seriously wrong with SimpliVity, it seems more likely that the company is simply the victim of a common dynamic in the data center software market. In such cases, it’s common for buyers to coalesce around particular platforms, leaving secondary players less attractive prospects. In fact, a similar situation occurred in 2007 as VMware was rising to prominence, and competing hypervisor vendor XenSource was purchased by Citrix for $500M. That was substantially less than the $635M that EMC paid for VMware in 2004.

Nutanix’s accelerating success and market leadership means that getting traction or accelerating sales is tough for competitors like Simplivity. In turn, that makes a deal with a far larger player like HPE, even at a significantly lower than once hoped for price, extremely attractive. Bottom line—HPE determined that $650m was a fair price for Simplivity and the company’s shareholders agreed.

Final analysis

So can HPE capture the benefits it hopes will accrue from buying SimpliVity? That’s not easy to say at this point. On the plus side, SimpliVity offers a solid, innovative software-defined solution—OmniStack—that has done quite well in the hyperconverged and hybrid cloud markets. Adding the company to its quiver should be a plus for HPE, and it also complements the company’s other recent hybrid cloud acquisition, CloudCruiser.

But the way ahead for HPE may not be as simple as it assumes. Like Nutanix’s solutions and those of other software-defined, hyperconverged players, OmniStack can run on virtually any x86-based server and SimpliVity was strategic partners with several Intel-based hardware vendors, including Lenovo and Dell EMC. HPE is obviously planning for its own Proliant systems to become the platform of choice for OmniStack, but it would be surprising if Simplivity’s former partners don’t try to secure those customers for themselves.

Overall, the HPE/Simplivity deal should provide both companies long-term benefits. But it will also spark interesting times in the hyperconverged marketplace in the months to come.

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