HPE and SimpliVity – Hyperconverged Upward Mobility at a Price

HPE’s plan to buy SimpliVity for $650M says as much about HPE as it does the market for software-defined infrastructure (SDN) solutions. There are solid financial reasons for the deal, as noted in HPE’s announcement; market research suggests sales of hyperconverged solutions (approximately $2.4 billion in 2016) will enjoy a compound annual growth rate (CAGR) of 25 percent, or nearly $6 billion, by 2020.

That makes hyperconverged a better and more attractive bet than the single-digit gains in sales volumes and flat/ declining revenues that general purpose servers currently offer. Taking those points into account, HPE’s hopes that SimpliVity will buoy up its bottom line seem clear enough.

But looking closer, the planned acquisition also underscores the competitive challenges facing both HPE and SimpliVity. HPE has done pretty well in terms of hyperconverged market share, at least until Dell bought EMC. Along with significant gains in several other IT infrastructure segments, that remarkable acquisition gave Dell EMC a substantial lead in converged and hyperconverged sales that will be difficult to match, let alone surpass.

That clarifies HPE’s interest but what about SimpliVity? The company fares well in competitive market rankings, including Gartner’s hyperconverged Magic Quadrant. However, competitor Nutanix enjoys bigger headlines and brighter reviews.

How Nutanix’s success has impacted SimpliVity’s bottom line is tough to gauge since only the former company is publicly traded. But Nutanix’s successful IPO last September which saw the company’s shares surge by 130 percent on the first day of trading may well have exerted downward pressure on SimpliVity’s value.

The fact of the matter is that after the HPE deal was announced, people began questioning the acquisition purchase price, which was just 2.5X SimpliVity’s funding (or about half the average for similar start-ups). More troublesome was that the $650M HPE agreed to pay was significantly below the $1B+ estimated value SimpliVity enjoyed just a few months ago.

That’s certainly disappointing but it doesn’t necessarily suggest that the company has a serious or fatal flaw. Instead, it seems more likely that SimpliVity is simply enmeshed in a common data center software market dynamic where it’s common for buyers to coalesce around particular platforms, leaving secondary players less attractive prospects.

In fact, a similar situation occurred as VMware was rising to full prominence as the leading platform for x86-based system virtualization. In 2007, competing hypervisor vendor XenSource was purchased by Citrix for $500M, a figure that was substantially less than the $635M EMC paid for VMware in 2004.

In short, with Nutanix’s accelerating, getting traction or increasing sales becomes increasingly for competitors like SimpliVity. That makes an offer from with a far larger player, like HPE difficult to ignore or decline, even at a considerably lower than hoped-for price. Bottom line – HPE felt the $650M it offered was a fair price, and SimpliVity’s owners agreed.

Final analysis

Another question to consider: Will HPE capture the benefits it hopes from buying SimpliVity? That’s hard to say. SimpliVity offers a proven, innovative software-defined infrastructure solution—OmniStack—that has done well in the hyperconverged and hybrid cloud markets. That should be good for HPE, and complements the company’s other hybrid cloud solutions including recently acquired CloudCruiser.

But the road before HPE isn’t likely to be a straight or smooth as it hopes. Like solutions from other software-defined, hyperconverged players, including Nutanix, SimpliVity’s OmniStack can run on virtually any x86-based server and the company counted several Intel-based hardware vendors, including Lenovo and Dell as strategic partners. HPE obviously intends for its Proliant systems to become the platform of choice for OmniStack customers, but it would be surprising if SimpliVity’s former server partners let HPE proceed uncontested.

Those points aside, the deal should provide both HPE and SimpliVity long-term benefits. However, what’s good for the two companies is also likely to leave some hyperconverged customers and portions of the marketplace unsettled for the remainder of 2017.