Dell moving into GlassHouse?

Comment Back in December 2007, a confident GlassHouse Technologies, sensing good prospects in its services and consulting area, filed for an IPO. In the spring of 2008, it entered a strategic partnership with Dell, made another acquisition - and then the recession happened. The company has started firing people as it cuts costs and drives towards profitability in the words of Curtis Preston, one of the world's most influential bloggers about backup technologies and procedures. What is going on?

GlassHouse Technologies was founded in 2001 by Mark Shirman and Richard Scannel to provide vendor-independent services and consulting. It has a storage heritage and has expanded into data protection, virtualisation, data centre services, and managed services. Product sales were 44 per cent of revenue in 2004 but declined to almost zero in 2007, the company now being focussed entirely on services.

It has grown through a sustained policy of acquiring focussed services companies with five bought by the end of 2006. Four more were bought in 2007, which collectively cost $30m in stock and cash: RapidApp of Chicago, Illinois, a server virtualization company; Data Center Moves International of London, UK, and its data centre services offerings; MBI Advanced Computer Systems Ltd of Israel; and Integrity Systems Inc of Israel.

The acquisitions bring in consulting staff and clients and also consulting and services intellectual property [IP], enabling the firm to grow faster than by hiring staff alone.

The intended IPO, with a potential $100m target, was registered with the SEC in December 2007, but no prospectus was ever offered detailing the number of shares on offer and their price. It would have been reasonable to expect a second or third quarter IPO event. Projected sales revenue for 2008 was reported to be around $91m.

The strategic partnership with Dell commenced in March this year. It included an undisclosed investment by Dell and provided Dell with access to GlassHouse's IP and sales and marketing resources over a three-year period. At the time, Mark Shirman, GlassHouse president and CEO, said: "Dell is a natural partner for GlassHouse as we are both focused on service offerings in the storage, virtualization and data center markets."

At the beginning of June, GlassHouse bought the TPP Group, a UK consulting and services operation, to expand its storage management capabilities across the UK. The cash amount was not disclosed.

At the end of June, Dell announced a stronger services offering which included a GlassHouse component: "In partnership with GlassHouse Technologies Inc, Dell will plan, design and implement IT disaster recovery plans to ensure companies have the people, process and tools to restore IT operations in the event of a crisis."

Then the recession hit. In December this year, GlassHouse reportedly obtained more funding ($9.8m) from Cisco, a new investor, in what was a sixth round.

It also let Curtis Preston and some other people go as it reduced costs and drive towards profitability, meaning it wasn't profitable. The headcount was 425 people in September 2007, having grown from 200 a year earlier. These people need paying, and if the service contracts are not coming in to use them then they start looking more and more expensive.

It looks quite unlikely that 2008 sales will reach the hoped-for $91m. The picture being painted here is that the recession has sharply reduced GlassHouse's revenues, making a fresh search for funds inevitable.

The recession has most probably killed off the IPO hopes and the venture capital backers plus Cisco and Dell, who have collectively contributed $64m in funding over six rounds, aren't seeing any realistic possibility of a profitable exit from the company until 2010 or so. The longer the recession continues, the further away moves the point at which they can crystallise their investment.

With less money coming in, GlassHouse can't continue buying up niche services operations to strengthen its own offering and so compete more strongly with IBM Global Services and HP's EDS as well as Accenture, EMC, and others. It's quite straightforward to build a scenario in which the investors look at another option, such as selling the company, and think of Dell, an existing GlassHouse investor and strategic partner, with a perceived need to increase its services sales in the face of a resurgent HP and flagging hardware sales relative to its competition. If they are thinking of a sale, then there will be other potential candidates.

Dell's CFO, Brian Gladden, has been reported as thinking a big acquisition is needed to help restore Dell's fortunes.

Tony Lock, a programme director at Freeform Dynamics, said: "As rumours go, it's perfectly believable. Getting IPOs off the ground in the current market would be hard enough anyway. Most companies these days that are privately-owned never make it to an IPO. They get acquired."

"Cisco investing [in GlassHouse] makes just as much sense. Cisco has been growing its storage business over the last few years, like Dell. Storage solutions are by no means simple to implement and skills in the storage area are very much in demand. Storage has good growth potential because of the volume of data being generated."

Perhaps what the present GlassHouse investors need - something to 'gladden' their hearts - is for Dell to stump up something between the invested $64m and the IPO-targeted $100m and buy the company.

Neither GlassHouse nor Dell have responded to requests for comment. ®