UPDATE 3-Dell to buy data storage network firm for $1.4 bln

(Adds background on VMware, EMC, analyst comment)

By Philipp Gollner and Franklin Paul

SAN FRANCISCO/NEW YORK, Nov 5 (Reuters) - Dell Inc (DELL.O) said on Monday it will buy data storage network company EqualLogic for $1.4 billion, its largest acquisition, as it seeks to boost its fastest-growing business.

Privately held EqualLogic is a maker of Internet-based technology, known as iSCSI, for connecting corporate data-storage networks. Dell expects the acquisition to reduce earnings per share excluding some items by a total of 2 cents to 5 cents for its fiscal 2009 and 2010.

With the acquisition, "Dell has a position in the future technology for the storage industry," founder and Chief Executive Michael Dell told Reuters in an interview.

Data storage accounts for about $2.4 billion of Dell's annual revenue of about $57 billion, he said. The purchase gives Dell, the world's second-largest personal computer maker after Hewlett-Packard Co (HPQ.N), a bigger foothold in the fast-growing business of virtualization, which allows a single computer to operate like multiple machines, he said.

EqualLogic, based in Nashua, New Hampshire, is a partner of VMware Inc (VMW.N), which is majority-owned by EMC Corp (EMC.N), the world's largest data storage equipment maker. Dell already resells EMC storage to business clients.

"It's a partnership with VMware," Michael Dell said. "These products go hand-in-hand with VMware, with VMware solutions."

The purchase "extends the Dell and EMC partnership," he added. "We're all doing more together."

Dell accounts for about 15 percent to 16 percent of EMC's revenues and the purchase will probably lead the two companies to reaffirm their relationship, Goldman Sachs analyst Laura Conigliaro wrote in a research note. She has a "buy" rating on Dell,

"That said, the die is cast," Conigliaro wrote. "Dell is now beginning to build an independent presence in storage."

Dell shares were down 0.85 percent at $29.80 in midday trading, while VMware stock slumped 4.3 percent to $112.07 and EMC was down 4.3 percent. The Dow Jones Industrial average fell 0.6 percent.

Michael Dell said the iSCSI storage market is expected to grow to 25 percent of disk storage systems sold to all enterprises by 2011.

Analyst Shannon Cross of Cross Research said the acquisition by a company not known for large purchases shows that Dell is using its cash to buy differentiated intellectual property rather than buy back stock, which might more quickly benefit shareholders.

"Shareholders are worried that Dell is buying things and not stock (and) concerned there may be more coming that is dilutive," said Cross. "However, acquisitions position Dell for the future."

Dell said last week it expected to resume share buybacks after suspending them for more than a year as it investigated accounting irregularities. The audit, which resulted in restatements that trimmed Dell's reported net income by $92 million over a four-year period, was completed in August.