SAN FRANCISCO -- Shares of EMC ( EMC) tumbled on news that one of its largest customers may soon become one of its largest competitors. Computer giant Dell ( DELL) announced plans Monday to acquire data storage gear maker EqualLogic, signaling its intention to develop homegrown data storage products rather than reselling EMC's as it does now. What's more, the $1.4 billion price it paid for EqualLogic underscores Dell's aggressive approach to sell storage gear to small and mid-sized business, which have been a fast-growing segment of EMC's business. EMC shares were recently down $1.07, or 4.4%, to $23.48 amid a selloff in the broad market. Earlier Monday, Goldman Sachs analyst Laura Conigliaro downgraded the stock, citing primarily valuation concerns, as well as possible competition from the Dell announcement. EMC shares have doubled in the past seven-and-a-half months. Over the last year, Dell has become one of the biggest buyers of EMC equipment. At the end of the June quarter, Dell accounted for about 15% of EMC's total revenue, up roughly 11% a year earlier. Both EMC and Dell said that their relationship remains intact and that the EqualLogic storage gear won't replace purchases Dell makes from EMC. In 2006, the two companies extended their relationship through 2011. But the deal will put the two squarely in competition for customers on the lower end of the market.
Middle-market companies are an attractive customer group for EMC and other large data storage firms such as Hewlett-Packard ( HPQ) and IBM ( IBM). Many need to put storage systems in place to create an electronic paper trail for lawsuits and other regulatory matters as well as for data backup and retrieval in the event of a physical disruption, says Simon Robinson, director of storage market research for the technology analysis firm 451 Group. "Small- and medium-sized businesses are facing the same sorts of data growth, storage and management issues that larger enterprises are facing," Robinson says. EqualLogic's products run on a newer storage technology called Internet SCS, or iSCSI, that appeals to smaller firms because it runs on their existing computer networks. Traditional storage technology, called Fiber Channel, runs on a separate network and requires a different set of skills and expertise to manage. Dell doesn't resell EMC's iSCSI products. The market for iSCSI technology is still small compared to the overall amount spent on storage, but it's one of the fastest-growing segments of the industry. According to data research firm IDC, the iSCSI market swelled by over 57% in the second quarter, reaching $191 million. During first nine months of the year, EqualLogic had revenue of $91 million, a 34% increase over its total 2006 sales.