The Cranky Admin

The Fallout from HPE's Acquisition of SimpliVity

VMware may be threatened, among other aspects.

• By Trevor Pott
• 01/18/2017

Hewlett Packard Enterprise (HPE) just announced an agreement to acquire SimpliVity for $650 million in cash. SimpliVity is the No. 2 hyper-converged infrastructure (HCI) vendor, boasting a varied customer base and an excellent product. HPE has repeatedly tried to break into the HCI market, with little success.

The news follows months of rumors, but still comes as something of a shock. SimpliVity has been dogged by rumors of acquisitions for years. Cisco, Huawei, Lenovo and HPE have all featured prominently in various rumours at different times.

Additionally, HPE is one of the few major vendors that SimpliVity doesn't currently use in its product lineup. SimpliVity hyper-converged servers are currently available from Cisco, Lenovo, Huawei and Dell. Dell provides the OEM hardware for the SimpliVity-branded nodes and also offers a meet-in-the-channel Dell-branded solution.

Rumors about a Cisco acquisition peaked in 2015 and were followed by Cisco sort-of-but-not-quite-acquiring rival Springpath instead. The Cisco-Springpath tie-up ultimately saw Springpath devote its entire engineering efforts to integrating with Cisco UCS, making the company a de facto arm of Cisco. SimpliVity is currently engaged in a patent lawsuit against Springpath.

A Feature, Not a Product
SimpliVity's unique selling point comes from its unique approach to storage. This makes use of a field-programmable gate array (FPGA) hardware accelerator to provide for real-time data deduplication without impinging upon the host CPU (SimpliVity's hardware accelerator isn't just an FPGA. There's also flash, RAM and a supercap in there. Useful for not losing data if the power goes out.) SimpliVity's approach to storage also makes it rather efficient in multi-site environments.

From a purely technical standpoint, if what you wanted was a basic hyper-converged solution that provided a solid storage layer with great data efficiency, SimpliVity has been unbeatable. Unfortunately, this is where SimpliVity chose to stop.

Other hyper-converged vendors -- most notably Nutanix -- figured out some time ago that hyper-convergence is a feature, not a product. The product is a turnkey hybrid cloud. SimpliVity has consistently resisted any notion that it should devote time or effort to such a development, insisting that it would rely on hybrid cloud solutions provided by other vendors.

VMware Threatened
More specifically, SimpliVity was betting on VMware to pull a hybrid cloud rabbit out of its hat, only to see VMware move from miserable failure to miserable failure in this area. HPE, on the other hand, already has turnkey cloud offerings, notably the "Azure in a can" solutions it has been working on over the past few years. This culminating in the company's implementation of Microsoft's Azure Stack.

If you put SimpliVity's infrastructure expertise together with HPE's Azure Stack knowledge, you get one heck of a product. Instantly, SimpliVity becomes a realistic counter to Nutanix's hybrid cloud ambitions, and a very real threat to VMware. HPE gets to ship more boxes and Microsoft just keeps on winning. It already has the best hybrid cloud solution out there, so anything that makes it better is, at this point, just gravy.

It's also worth bearing in mind that SimpliVity's technology has uses for HPE beyond HCI. External storage arrays are a declining market, but adding SimpliVity's dedupe tech to 3PAR might help HPE carve out a slightly larger slice of that shrinking pie. SimpliVity thus represents two birds with one stone for HPE. A bargain at $650 million.

Buying Low -- Very Low
The purchase represents a significant devaluation of the company. At one point, SimpliVity was said to be valued as high as $3.9 billion (though only valued at $1 billion based strictly on funding rounds), making the $650 million sale insulting by comparison. SimpliVity took in $276.5 million of funding over its history, and investors are going to expect better returns than simply getting their money back.

This doesn't leave a lot of money to be spread among the shareholders. Those shareholders include the everyday staff of SimpliVity, many of whom have worked ruinously insane hours for five or more years in the hopes of seeing a high-value exit. The HPE acquisition has dashed those hopes. It remains to be seen what staff retention will look like at the end of the year, but my guess would be a swift exit of top talent.

The low purchase price when compared to the valuation is a blow to the entire HCI industry, which had recently had its confidence bolstered by Nutanix's wildly successful IPO. SimpliVity's reported low sales to funding ratio likely played a large part in this disparity. That said, SimpliVity's flatly unambitious roadmap is also likely to have been important.

This doesn't bode well for HCI competitors who have, like SimpliVity, chosen not to pursue a turnkey cloud strategy. Some competitors may be working on these solutions privately, expecting to make announcements in 2017; however, others had also been betting on VMware.

A Harbinger of Things to Come
With SimpliVity acquired and rivals VMware and Nutanix both public companies, all eyes turn to Scale Computing as the next-largest HCI competitor. The first HCI company of the year has been claimed. Given how oversaturated the HCI market is, more are sure to follow.

Disclaimer: SimpliVity was a client of the author in late 2015 and early 2016.