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Wednesday, September 22, 2010 by Helena Schwenk
This week IBM announced its agreement to acquire Netezza, a leading provider of data warehousing appliances, for $1.7 billion. The deal equates to $27 per share paid for in cash and represents a 9.8% premium over its closing price on Friday. The acquisition is a good move by IBM: by buying one of the pioneers in the market IBM not only adds some smart and complementary technology to its portfolio but boosts its appliance capabilities at both the lower end of the enterprise data warehousing market and in the mid-market, which hasn’t been a traditionally strong area for the company in the past.
One of the brightest stars in data warehousing appliance market
The appliance approach has seen rapid take-up and validation over the last five years or so. By packaging together preconfigured hardware, storage and software in a purpose-built unit, appliances offer companies a lower cost and arguably faster and cheaper way to implement large scale data warehousing solutions when compared to traditional approaches.
By acquiring Netezza, IBM has picked up the pioneer in the data warehousing appliance field. The company was founded in 2000 and so has been around longer than many other appliance start-ups. As a result it has a maturing product line and a sizeable customer base of more than 350 customers including Virgin Media, NYSE Euronext, Time Warner, Nationwide Insurance and the Carphone Warehouse.
The benefit of Netezza’s plug and play architecture means it can accelerate and simplify data warehousing deployment as less tuning, maintenance and administration of the system is required. Similarly, it leverages a specialist (Asymmetric Massively Parallel Processing) architecture that facilitates fast query times on large volumes of data. It achieves its high performance through its ability to move the query processing horsepower as close as possible to the storage elements of the appliance and through very efficient table scanning techniques. These factors, combined with an attractive price per terabyte (with prices starting at $20,000 per usable terabyte), means its appliance has garnered attention and take-up from both mid-market and large enterprises. For example, companies such as the Carphone Warehouse, a UK based mobile phone retailer, use Netezza for revenue assurance, customer analytics and CDR analysis and as a result has managed to recover $59 million in additional revenue as well as radically reducing end user query times.
A mutually beneficial partnership
Both companies already have experience working with each other and have around 100 joint customers. Netezza’s appliances for instance, are built on IBM System x and work with InfoSphere software in many customer sites to provide a platform for analytic applications. In addition, the company re-architectured its flagship product line – called TwinFin – in 2009 to utilise commodity hardware components. As part of its redesign it transitioned from PowerPC processors to Intel CPUs and moved from proprietary blades to IBM blades. We suspect that this was a huge part of the attraction of Netezza for IBM. That coupled with its recent financial performance – it posted revenue of $63.8 million for its most recent quarter ending July 2010, a 45% increase year over year – means it has probably been on IBM’s acquisition shortlist for some time.
Netezza is broadly complementary to IBM’s data warehousing platform
As part of its analyst call about the acquisition, IBM positioned Netezza as complementary to its existing data warehousing platform, but I believe this slightly over simplifies the situation. IBM already has its Smart Analytic System, a pre-integrated and purpose-optimised system aimed at large-scale analytic workloads that combines IBM hardware and software (including options to embed Cognos and SPSS) with vertically aligned content and services. This very much plays into the high performance, large scale (and big ticket) data warehousing arena. While Netezza’s sweet spot is around independent or dependent departmental data marts where its appliance acts as a downstream analysis platform to an enterprise data warehouse (EDW), the company was making in-roads in the enterprise-class workload space. Similarly IBM also has the InfoSphere Balanced Warehouse appliance and the Informix Data Server as a data warehousing platform. The potential for overlap is likely to leave some customers wary and/or confused.
That said, as a combined entity there are many opportunities for both companies to exploit. As part of IBM, Netezza can utilise its scale and distribution channels to reach out to more customers across different geographies. Likewise IBM can also plug some natural gaps in Netezza capabilities especially those around data integration, master data management, BI and predictive analytics. But equally there are opportunities to leverage both technology portfolios to develop new solutions such as those that bring unstructured and structured data together, improve data warehousing performance and scalability through Hadoop and MapReduce implementations, real time event stream processing systems and in-database analytics. The latter capability makes an obvious integration point given the wealth of analytic capabilities IBM has with SPSS and Cognos.
IBM is on an acquisition roll
This acquisition marks a busy time for IBM. Only last week it announced the acquisition of OpenPages, a risk management software provider. Rather staggeringly this means the company has spent more than $12 billion on 23 analytic related acquisitions in the last four years. Its growingtechnology portfolio alongside its 6000 strong consulting organisation form part of the company’s business analytics vision and strategy which IBM expects to generate $16 billion of revenue by 2015.
But equally the acquisition is a response to increasing competitive pressure from its biggest rival Oracle and its Exadata offering. The timing of the announcement is no coincidence either; it comes on the first day of Oracle OpenWorld something presumably designed to unsettle if not upstage Oracle at one of its premier user events; especially since it is announcing an upgrade to the Exadata appliance. Similarly competitive pressure comes in the form of data warehousing heavyweight Teradata (who recently acquired Kickfire), Microsoft via SQL Server 2008 R2 (based on its Datallegro acquisition) and Greenplum, which is currently in the process of being acquired by EMC. Smaller players such as Aster Data, Vertica and Kognitio are also making in-roads in the data warehousing market with their various different flavors of appliances. Given the compelling value proposition and use case for appliances I suspect further consolidation and acquisitions will be inevitable.
The Netezza acquisition is expected to close in the fourth quarter.