Why IBM's Flashing Its Storage Cash

NEW YORK ( TheStreet) - IBM's ( IBM) decision to acquire privately-held flash memory specialist Texas Memory Systems (TMS) this week was first and foremost an attempt to bolster its storage business. But could it also signal more storage industry M&A?

Clearly, IBM sees TMS's solid state technology as a way to boost its own storage story. With fewer moving parts than traditional hard disk drives, solid state systems offer users faster data-access speeds, as well as low power and cooling costs.

"It will really be a great enabler, not just for storage, but for our systems as well," IBM vice president and integration executive Terri Mitchell told TheStreet. The company's existing flash partnerships with Fusion-io ( FIO) and LSI ( LSI), she added, will be unaffected.

Although the value of the TMS deal was not disclosed, storage is a key focus area for IBM. Revenue from the tech giant's Systems and Technology group, which encompasses servers and storage, was down 9%, or 7% adjusted for currency, during its recent second quarter. Storage hardware revenue was flat year-over-year at constant currency.

The solid state market, however, is growing at a rapid pace. Tech research firm IDC estimates that solid state technology being shipped into enterprises will grow significantly over the coming years, reaching almost 3 exabytes by 2016. By way of comparison, 1 exabyte of data is the equivalent of more than 4,000 times the information stored in the U.S. Library of Congress, according to a report released by McKinsey last year.

Set against this backdrop, the initial reaction to IBM's deal has been positive.

"In our view, the acquisition makes strategic sense as solid state storage becomes a more critical part of helping improve performance and lower power requirements in storage systems," explained Brian Marshall, an analyst at ISI Group, in a note.

"IBM will gain a significant flash storage technical boost with TMS and integrate the technologies across its hardware and software portfolios," added Krista Macomber, an analyst at Technology Business Research, in a note.

Roger Kay, president of Endpoint Technologies Associates, told TheStreet that the TMS deal makes perfect sense for acquisition-hungry IBM.

"Getting control of all elements of its solution is one of its goals," he said. " IBM really buys a lot of little companies - the idea is to assemble a lot of different technologies under one roof."

TMS is IBM's fourth storage systems acquisition since 2007. Company-wide, Big Blue has made more than 100 acquisitions since 2003.

The TMS purchase may also have broader implications for the storage industry, according to Sterne Agee analyst Alex Kurtz, who says that it could prompt rivals to open their wallets. Specifically, the analyst will be keeping his eye on storage giant EMC ( EMC) which has been touting its VFCache technology as a way to place flash in servers via a PCIe card.

"We believe EMC may have to begin to consider acquiring Fusion-io if its effort with VFCache doesn't materialize in the first half of 2013," explained Kurtz, in a note. " NetApp's ( NTAP) upcoming partnership with Fusion-io may also act as an accelerant to EMC considering Fusion-io if that joint product development generates traction as well."

Flash specialist Fusion-io, which reported stellar fourth-quarter results last week, has already carved out a lucrative niche in corporate data centers. The Utah-based company counts Apple ( AAPL) and Facebook ( FB) amongst its customers, and also boasts Apple co-founder Steve Wozniak as its chief scientist.

Endpoint Technologies' Kay would not rule out the possibility of an EMC/Fusion-io deal, noting that valuations are attractive at the moment. "For EMC to backfill their offering by grabbing a Flash supplier in a down market would make a lot of sense," he said. "I don't know whether I would bet on it, but it's conceivable."

EMC, however, has been banging the drum about its Flash strategy, recently noting that more than 100 customers are using VFCache.

The Hopkinton, Mass.-based company, which shipped 24 petabytes of flash drive capacity in 2011, also acquired storage array specialist XtremIO earlier this year to boost its efforts in this space. By way of comparison, a single petabye stored on CD-ROMs would create a pile of discs more than a mile high, according to the Library of Congress.

Salt Lake City-based Fusion-io has a market cap of $2.64 billion.

Fusion-io and EMC declined to comment on this article.

-- Written by James Rogers in New York.

>To submit a news tip, send an email to: tips@thestreet.com.

Check out our new tech blog, Tech Trends. Follow TheStreet Tech on your wireless devices

More from Technology

How to Play Nvidia and Intel on a Trade War With China

How to Play Nvidia and Intel on a Trade War With China

These 5 Tech Giants Still Aren't That Expensive

These 5 Tech Giants Still Aren't That Expensive

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

Trump Puts Tech in Trade War Crosshairs With Planned Curb on China Investment

Trump Puts Tech in Trade War Crosshairs With Planned Curb on China Investment