East Coast Meets West Coast in New Merger

A shakeout has been sweeping through the storage market. Large solutions providers such as EMC Corp. and Compaq Computer Corp. have been pushing aside smaller players. Against this backdrop, Box Hill Systems Corp. and Artecon Inc. are merging to compete more effectively in the fast-growing storage area network (SAN) and Internet storage segments of the market.

A shakeout has been sweeping through the storage market. Large solutions providers such as EMC Corp. (www.emc.com) and Compaq Computer Corp. have been pushing aside smaller players. Against this backdrop, Box Hill Systems Corp. (www.boxhill.com) and Artecon Inc. (www.artecon.com) are merging to compete more effectively in the fast-growing storage area network (SAN) and Internet storage segments of the market.

Each company brings different strengths to the merger, which company officials and some analysts are calling a good fit. For one, the merger brings together players from two distinctly separate regional markets. Artecon is well established on the West Coast among leading-edge Internet service providers and telecommunications companies. Box Hill is strong in the New York financial community as well as among traditional telecommunications companies. "Artecon is very West Coast, and Box Hill is very East Coast," says Aaron Schatz, storage industry analyst at International Data Corp. (IDC, www.idc.com).

The companies have also been pursuing distinct technology approaches. Box Hill, which now offers a software-based RAID solution, was looking to develop a hardware RAID product, Schatz says. "Artecon has one, so that's settled." Artecon also has a network-attached storage product and tape backup libraries. Box Hill, meanwhile, has been a leader in the deployment of Fibre Channel and SAN-enabled products.

Box Hill has grown significantly over the past two to three years, "but not as fast as we would like," says Philip Black, CEO of Box Hill. "All CEOs in the storage industry realize we have to consolidate. We had been looking around at all of the players in the storage business, and the dance took us to Artecon. There's huge synergies and dove-tailing between the companies."

Aside from complementary customer bases and products, Black also notes, "Our product lines come from the high end of Unix. They've got midrange Unix from the original Artecon and Windows NT products from their earlier acquisition of Storage Dimensions."

The combined company will be called Box Hill Systems Corp. until a new name is approved, and it will continue to be listed on the New York Stock Exchange as such. The company headquarters and primary manufacturing will be located at Artecon’s headquarters in Carlsbad, Calif. Stockholders and regulators must still review and approve the deal, which is expected to close in the third quarter.

This merger will create "the biggest of the second-tier players," IDC’s Schatz says. There is still a considerable gap between the new Box Hill and market leaders such as Compaq, IBM, EMC, Sun Microsystems, and Hewlett Packard, which see annual revenues in the billions of dollars from disk storage systems. Other leaders include Data General Corp.’s Clariion storage division, StorageTek and Dell Computer Corp. (www.dell.com).

The new combined company will have about 400 people, Black says, who will lead international operations for the new Box Hill. The combined revenue for the two companies totaled about $168 million in 1998.

Along with its traditional storage customer base, the new company will concentrate on selling solutions into the ISP and Web-based application market. "We're repositioning the company from hardware storage supplier to Internet infrastructure solutions provider," says Miles Moore, vice president of marketing at Artecon. "We're going to direct our energies at segments of the market associated with Internet and intranet deployments."

IDC’s Schatz notes that the Internet application hosting market is one that many vendors are trying to enter. "It's like Internet stocks, with everybody concentrating on ISPs." He says, "Box Hill was having trouble trying to get into growing things like that."