IBM eyes FalconStor acquisition, sources say

Rumors are flying that IBM is in talks to acquire FalconStor to control the virtual tape library (VTL) market, according to industry sources.

IBM is in talks to acquire storage software company FalconStor Software Inc. in a bid to control the virtual tape library (VTL) market, according to industry sources close to both companies.

Rumors of deals involving FalconStor are a constant in the industry as the company has significant intellectual property, innovates faster than any other public storage company and is relatively cheap. At close of business Tuesday, FalconStor's market capitalization was $561.31 million. The company generated $20.2 million in revenue last quarter, well above the analysts' consensus forecast of $16.6 million, which represented a 55% year-over-year and a 56% sequential increase. This uptick is a fairly recent turnaround for FalconStor and comes largely on the back of VTL sales via its OEM partners.

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To say FalconStor is on a roll with VTL is putting it lightly. The company owns about 70% of the market with OEM partners, including Copan Systems Inc., EMC Corp., Nexsan Technologies Inc., Sun Microsystems Inc., 3PARdata Inc. and IBM among others, all rebranding its product. IBM has been deliberately coy about disclosing FalconStor as its VTL partner, but analysts able to get their hands on Big Blue's product said that it's clearly based on FalconStor's technology. Furthermore, IBM has disclosed that it is coselling FalconStor's continuous data protection (CDP) technology.

"At the heart of all these [VTL] products is FalconStor," said Arun Taneja, founder and consulting analyst with the Taneja Group. He had not heard about the deal but noted that VTL is becoming a critical technology to own. Three years ago, the ability to make disk look like tape was an easy way to get into the disk game and speeding up backup and recovery operations was a big win for customers, he said. Now Taneja said he believes that with the recent addition of deduplication technology into VTL products, the importance of this technology has shifted. "This combination is so powerful, VTL has a life of its own," he told SearchStorage.com.

The Taneja Group predicts the VTL market will be worth just north of $1 billion worldwide by 2010. That's a compound annual growth rate of 303% from last year. Another indicator of the strength of this market has been deduplication provider Data Domain Inc.'s recent S1 filing with the Securities and Exchange Commission (SEC) to go public.

Analysts agree a deal between IBM and FalconStor makes sense. "IBM can certainly afford them," said Brian Babineau, senior analyst with the Enterprise Strategy Group. Half a billion dollars is a rounding error for IBM, with a market capitalization of $145 billion.

IBM has already begun acquiring storage software companies this year with the purchase of data migration provider Softek Storage Solutions Corp. in January. That said, buying FalconStor would stir up the marketplace considerably, given all the OEM relationships it has with IBM's competitors. It would be a complex deal to pull off.

EMC announced in February that it had extended its contract with FalconStor through 2013. "They've signed a deal, so any acquirer would have to honor that," Taneja noted.

Wall Street analysts said that IBM has been looking at this acquisition for some time but has been waiting for FalconStor to get real traction. "That time would seem to be now," said one Wall Street analyst, preferring to remain anonymous as he is not authorized to speak with the press.

Neither IBM nor FalconStor officials would comment on this story for publication.

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