Yesterday, EMC Corporation (NYSE: EMC) announced that it was buying nLayers for $50 million cash. This is EMC's second acquisition of an Israeli software company within a month. In May, it bought Kashya for $153 million.
nLayers is a fairly young company to be making an exit. It began operating in 2003, when entrepreneur Gili Raanan, who also founded Sanctum, developed a technology in the area of analysis of the behavior of heavy applications in enterprise databases. nLayers' flagship product is InSight, which automatically identifies, maps and models the relationships and interdependencies between applications, servers and devices in a time-based, behavioral model based on a technology called application behavior modeling.
nLayers' business model has been collaboration with the big computing companies active in computing resources management. Among the companies with which it has cooperated are IBM's Tivoli division, Hewlett Packard Co. (NYSE:HPQ), and others. The collaboration with EMC is a fairly recent development, but it says a great deal about the field as a whole and also about EMC's intentions.
The intensity with which EMC has entered resource management is remarkable. In recent years, the company has turned from a provider of storage hardware and software into a provider of IT systems management software. The competitive environment in which the EMC operates and the focus of its products have changed accordingly. If, up to a few years ago, 80% of EMC's sales derived from storage systems hardware, this field now accounts for less than 50% of its revenue, while data management and protection software accounts for about 30% of sales, and the intention is to expand sales in this area.
The strategic change EMC has undergone finds expression in a series of acquisitions it has made in recent years. Eighteen months ago, EMC bought Smarts, which was based in the US but had an Israeli connection - its founder and CEO Shaula Alexander Yemini is the sister of Kobi Alexander, lately of Comverse Technology Inc. (Nasdaq: CMVT). Smarts had technology capable of rapid identification of the sources of faults in enterprise networks. However, these capabilities were only for network environments. EMC added to the technology the capacity to identify faults in the storage environment as well.
The acquisition of nLayers adds another stratum, which is automatic mapping of all applications and servers. This means that today, under the Smarts umbrella, if there is a breakdown in an organization's computer systems, the software identifies the breakdown and its source, and can work out the severity of the breakdown and how it should be fixed.
EMC's next Israel acquisition was Kashya, a month ago. EMC changed Kashya's name to EMC Israel Software Development Center, and all the acquisitions it makes in Israel will be added to this organization.
The current acquisition indicates a clear direction for EMC in Israel. Like another software management giant BMC Corporation (NYSE:BMC), which has operated a large R&D center here for several years and adds to it all the time (such as through the acquisition of Identify two months ago), EMC intends to find its place in the Israeli technology scene in a similar fashion.
EMC Israel managing director Moshe Brauner said EMC’s expansion in the Israeli market was only just getting underway. “We’re going to expand our R&D activity in Israel. In the cases of both Kashya and nLayers, the company declared that it was going to significantly expand the number of employees at the companies and create a serious center here.”
This is not the first time that EMC has operated a development center in Israel. It had an R&D center here up until five years ago, but it was closed. Brauner said EMC was going to hire hundreds of new employees for its reopened development center over the coming year. “There’s a group of people responsible for M&A at EMC. They said they discovered a lot of interesting technologies in Israel, and that they’ll return. There was a kind of U-turn. Over the years, I sent to the company lists of technologies of Israeli companies. At some point, the direction turned towards Israel, and we’re beginning to see the fruits.”
EMC’s Israeli R&D center will be under the responsibility of the company’s US activity, and managed by a vice president.
On the target side of the acquisition, the story of nLayers is no less fascinating. The company had $1.5 million in sales in 2005, and sales this year surged following expanded cooperation with large companies. Gemini Israel Funds and Walden Israel invested in the company, assisting Raanan from the moment he proposed founding the company. Gemini’s US-based Advent fund also invested in the company.
Walden Israel general partner Eyal Kaplan, a director of nLayers, said the acquisition came at the right time, despite promising figures. “There’s always a dilemma about whether to sell or not,” he says. “Over the past year, surveys have been published saying that nLayer’s sector (configuration management database (CMDB)) is about to become very important, strategically. We’re seeing computing giants, such as IBM (NYSE: IBM), Symantec (Nasdaq: SYMC) and Mercury Interactive Corp. (Pink Sheets:MERQ) making acquisitions in this field. We had the feeling that it was better not to end up in a David vs. Goliath situation, and compete against the computing giants. I think we did the right thing from this perspective.”
Kaplan says other large players in the field, such as IBM, Hewlett Packard, and Computer Associates (NYSE:CA), also considered buying nLayers. “We had a number of cooperation agreements with the large companies, and we were constantly talking with them. But we felt best with EMC, and in the end, we went with them.”
nLayers’ investors are making an impressive exit with this deal. Gemini and Walden each invested $4 million in the company, and owned a 65% stake. This means that they made $33 million on the deal; a return of 400% on their investments. This is Walden’s second major exit, following the sale of Passave Technologies to PMC-Sierra (Nasdaq:PMCC) two months ago. Raanan and nLayers’ employees will make $17.5 million.
Gemini managing partner Yossi Sela said today that this was a good deal for the fund, but he declined to be more specific. “The company raised a little money, and was sold, and we’re satisfied. This shows us that it’s possible to build software companies in a way that suits today’s world. Both the investors and entrepreneurs learned something. During the gay years, you had to raise $50 million for software companies before making an exit. We’re now talking about a few million dollars, and it turns out that it’s possible to do good work. I think the company did very good work.”
Sela said nLayers’ strategic agreement with EMC paved the way for its acquisition. “The company worked hard on business development, which is another important lesson we learned. It’s important for new companies to work with large ones, and learn to use their muscles. nLayers did an exceptional job.”
Published by Globes [online], Israel business news - www.globes.co.il - on June 8, 2006
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