H-P Taking on IBM With LeftHand Buy

Hewlett-Packard has bought the start-up company for $360 million in cash in an attempt to boost its data-storage strategy.
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Hewlett-Packard

(HPQ) - Get Report

said Wednesday it bought start-up company LeftHand Networks for $360 million in cash in an attempt to boost its data-storage strategy.

The acquisition of Boulder, Colo-based LeftHand, which sells virtualization software for expanding the capacity of storage hardware, could prove crucial as H-P looks to challenge

IBM

(IBM) - Get Report

in the lucrative data-center space.

Faced with an increasingly volatile spending climate, tech vendors such as IBM and H-P are aiming to sell additional software and services on top of users' existing hardware, with virtualization a popular choice for customers.

Analyst firm Robert W. Baird & Co. maintained its outperform rating on H-P in a note released today, citing LeftHand's ability to revitalize the company's storage business.

"We view the acquisition as a strategically important investment in H-P's lagging storage portfolio, and a strong step in the right direction," analyst Jayson Noland wrote. "LeftHand adds some much-needed IP to H-P's mediocre storage portfolio."

LeftHand is particularly attractive to H-P because it uses a storage protocol called Internet SCS, or iSCSI, which is becoming popular with smaller firms. Because iSCSI runs on users' existing computer networks, it's fast emerging as an alternative to the traditional storage technology, called fiber channel, which runs on a separate network and requires a different skillset.

One of LeftHand's closest competitors is EqualLogic, which was bought by

Dell

(DELL) - Get Report

for $1.3 billion earlier this year, underlining the current popularity of iSCSI storage.

"We view iSCSI storage as a compelling small/mid-market value to customers and a strong growth market within storage," writes Noland. "We believe H-P will see traction comparable to what Dell has achieved so far with EqualLogic."

H-P, which recently announced 24,600 job cuts, is keen to grow its enterprise storage and servers division at a time when customers are struggling with massive data growth. Despite this trend, the ESS business accounted for less than 20% of H-P's recent third-quarter revenue.

LeftHand and H-P already share some history; the startup's software already works with H-P's Proliant and BladeSystem servers, ProCurve Networking devices, and its Insight Control management software.

H-P expects to complete the LeftHand acquisition, which is subject to certain closing conditions, in the fiscal first quarter of 2009.

Shares of H-P were recently down 1.6%. Dell and IBM also traded lower.