Looking at both sides of Cohesity’s acquisition of Veritas’ data protection unit

This syndicated post originally appeared at Zeus Kerravala – SiliconANGLE.

Softbank Group Corp.-backed Cohesity Inc. today boldly announced its intent to acquire the Veritas Technologies LLC‘s data protection business for $3 billion. The purchase will be funded one-third with equity, and the other two-thirds will be debt-financed through Haveli Investments, Premji Invest and Madrona Venture Group.

When the deal closes, the combined organization will have revenues of $1.6 billion, annual recurring revenue of $1.3 billion, and a profit margin of 27%, vaulting it into the pole position in the data protection market. The post-acquisition value of “Cohesitas” will be $7 billion, creating a massive company.

This is an interesting deal as it consolidates two major players in the $30 billion data protection industry, which is highly fragmented, filled with legacy vendors, and ripe for consolidation. Though being the No. 1 share player has some marketing advantages, there are other tangible benefits, such as:

  • Reduced customer acquisition costs. Since Cohesity launched, it has grown share by taking customers from Veritas and Dell, the top two share donors. Cohesity has accomplished this with good products but also by funding marketing programs, channel partners, salespeople and others, leading to high customer acquisition costs. Cohesity will own the customer; in theory, those costs should go down post-close.
  • Global expansion. The majority of Cohesity’s business currently comes from the U.S. Veritas has a highly diverse set of customers spread across the globe. When dealing with global and multinationals, presence matters, and Cohesity has that.
  • Data to fuel AI. In SiliconANGLE’s post, John Furrier mentioned combining “Cohesity’s AI-driven technology and Veritas’ extensible IP and customer base.” The key to this isn’t as much the artificial intelligence, since most vendors build from the same models, but rather the size of the data set to fuel the AI. Currently, Cohesity has a sizable customer base, giving it a large set of data for AI, but it is small compared with Dell, or Veritas. This acquisition could supercharge Cohesity’s AI efforts.
  • Financial benefits. Veritas is more profitable than Cohesity, bringing a level of profitability to Cohesity it has never had. This can be used to fuel R&D, expand its footprint, or other activities that the company previously could not do.

Although there is plenty of goodness on paper, there are also several risks that should be explored. First, I never like deals where a disruptor buys a legacy company. Generally, this means the growth has slowed, and an acquisition is being made to pump up the growth engine. This may or may not be the case with Cohesity. The company directed me to some IDC research from the first half of 2023 that supports their statement. A point worth noting is that the growth is off a much smaller revenue base than companies like Veeam and Dell, so it would have been interesting to see if they could have maintained double-digit growth as they doubled or tripled.

Cohesity, Rubrik, Commvault, Veeam and others were all taking share from Veritas, and Cohesity could have continued down that path. Other risks include:

  • Product rationalization. Cohesity and Veritas operate in the same customer segment, and the products appear to have a fair amount of redundancy. One question that needs to be answered sooner rather than later is how long it will take to integrate these disparate platforms. Until the roadmap question is answered, customers may pause their decisions or, worse, choose another vendor. This often happens when companies with similar products come together. One interesting point overlooked is that Cohesity is taking Net Backup, a product built for large enterprises, but not Backup Exec, which is focused down-market. The latter would have opened another segment for Cohesity.
  • Competitors stepping up their Veritas attack plans. At one time, Veritas was the big dog in backup and recovery. But that was about two decades ago, and since then, it has been the industry’s largest share donor, with everyone having a Veritas takeout plan. Acquisitions create doubt, particularly ones that are done for consolidation purposes, and every competitor is likely formulating a plan to hit up Veritas customers. I asked Commvault about its feelings on the deal, and Sarv Saravanan, Commvault’s chief customer officer, said, “This deal between Cohesity and Veritas could create complete chaos for customers. Platform integration challenges and redundant product portfolios could take years to address. With cyberattacks increasing in severity and frequency, there’s no time for that. Customers need to know if they’re hit, they can recover fast. In today’s world, cyber resilience equals business resilience.” Expect to see more of this from other vendors.
  • Managing debt. The deal’s financials showed that the combined company will have $1.6 billion in revenue and $2 billion in debt. That’s a lot of debt at that revenue number, particularly today when interest rates are high. If this acquisition fast tracks to an IPO and is wildly successful, it could manage the debt effectively. If the purchase causes customer concern through excited competitive pressure or an inability to define the roadmap clearly, or both, the business could slow down, making the debt unmanageable.
  • Customer conversion is not automatic. In my “pros” section, I cited lower customer acquisition costs as a benefit. I also used the “in theory” disclaimer as there is no guarantee that customers will de facto choose Cohesity. In fact, in deals like this, when a legacy vendor is combined with an innovator, the customer gives no extra edge to the new company just because they are the incumbent. If the business plans to evaluate multiple vendors, they will likely do the same.

This deal certainly has loads of potential but also a lot of risk. At a market level, consolidation is needed as the market has far too many vendors. Gartner’s backup and recovery Magic Quadrant has 16, with other vendors not qualifying. Cohesity CEO Sanjay Poonen (pictured) is taking a big swing with the bat. Will it pay off? Time will tell, but there is plenty of work to do from here.

Author: Zeus Kerravala

Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice.