UPDATE 2-Compellent talks options, including sale-sources

Tue Oct 26, 2010 5:43pm EDT

* Compellent meets with Qatalyst Partners

* Seen as strong mid-market target -sources

* Compellent stock rises as much as 13 percent

* CEO declines to comment on hiring a bank (Adds CEO declining to comment in fourth paragraph)

By Nadia Damouni

NEW YORK, Oct 26 (Reuters) - Data storage provider Compellent Technologies Inc CML.N has held preliminary meetings with Qatalyst Partners and other investment banks to advise it on options including a sale, said a source familiar with the situation.

Qatalyst, a boutique firm run by technology banker Frank Quattrone, advised competing data storage company 3Par Inc in its sale to Hewlett-Packard (HPQ.N) in September and Data Domain when EMC Corp (EMC.N) bought it in 2009.

Morgan Stanley (MS.N), which led Compellent's initial public offering in 2007, is also among the banks that it has talked to, said another source familiar with the situation.

Chief Executive Officer Philip Soran during a conference call to discuss Compellent's third-quarter earnings on Tuesday declined to comment on whether the company has hired a bank. Morgan Stanley and Qatalyst declined to comment.

Compellent shares gained as much as 13 percent after Reuters reported the meetings, then trimmed the initial gains. Shares closed up 10.9 percent at $19.70.

The meetings are preliminary, said a second source who declined to be identified because of the private nature of the process.

Qatalyst, which two other sources said is advising Compellent rival Isilon Systems Inc ISLN.O, could shy away from formally advising both companies at the same time because of a potential conflict of interest.

Over the last few years, Minnesota-based Compellent's revenue has grown rapidly, making it an attractive target, another source familiar with the situation in recent days.

In July, Compellent reported record quarterly revenue of $36.5 million, a 27 percent increase from a year ago.

SCARCITY OF ASSETS

Compellent, like 3Par, targets the storage area network market using fiber channel technology which provides high-speed connections between servers and storage devices. Compellent has a smaller market cap of $569 million, which would make an acquisition less expensive, said another source familiar with the situation.

Buyers are aware of the scarcity of assets in the high-end storage area network market, a paucity that helped trigger a public bidding war between Dell Inc DELL.O and HP over 3Par in August, said the third source.

Other deals in recent years in the storage sector include Dell's $1.4 billion acquisition of EqualLogic in 2008 and EMC Corp's (EMC.N) takeover of Data Domain in 2009. EMC bested an earlier bid from NetApp in the Data Domain deal. Data Domain hired Qatalyst for that deal.

Potential suitors for Compellent could include Dell, HP, IBM, Oracle ORCL.O, NetApp (NTAP.O), EMC and Cisco Systems Inc (CSCO.O), said another source familiar with the situation.

Meanwhile, Qatalyst is working with Seattle-based storage competitor Isilon, sources said, confirming earlier press reports. The first source said that Isilon management likely hired Qatalyst at the end of the 3Par process.

Isilon is trying to determine where it fits following the 3Par and Data Domain deals, said a fourth source familiar with the situation. The company's platform is considered less appealing than 3Par and Compellent as it offers what is known as network-attached storage, or NAS, technology tailored to media companies, said the sources.

An Isilon spokesperson declined to comment for the story.

There is a shortlist of bidders that would vie for and be interested in Isilon, including EMC, Dell and Oracle, said the sources. Though a deal could happen before the end of the year, the sources also described Isilon -- which has a market value of $1.9 billion and whose stock has more than doubled in the last 6 months -- as expensive.

"The 3Par process put a spotlight on the mix of storage companies," said a technology executive with knowledge of that business's deals landscape.

He said the sector is waiting for the "dominoes to get rolling," as tech giants, including EMC, Dell, IBM, Oracle and Cisco look to add software assets to their data centers.

Although bankers and advisers expect more deals in the software business, many of the best assets in the advanced storage space have already traded, said another source familiar with the situation.

In addition, with the 3Par and Data Domain deals resulting in bidding wars, the source said no one wants to be a CEO who makes pursues a company and loses. "It leaves a stigma on the cocktail circuit," he said. (Reporting by Nadia Damouni. Editing by Robert MacMillan)

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