Garnett & Helfrich Capital last week agreed to take control of Nortel’s blade server infrastructure unit, marking the firm’s third venture buyout since closing its inaugural fund in 2004. No financial terms were disclosed for the proprietary deal, but a Nortel source said that the unit generated nearly $50 million in 2005 revenue.
Blade servers are, basically, housing for racks of thin, stackable motherboards that share the rack’s common power supply and air-cooling resources. The Nortel unit was launched several years ago to provide load balancing for the blade servers, and has expanded to include a robust cadre of switching and router functionalities.
The unit currently stands as the market leader – just ahead of Cisco Systems – with about a 30% market share, thanks to its contracts with blade server leaders IBM and Hewlett-Packard.
Following the Garnett & Helfrich deal, it will be renamed Blade Server Technologies Inc., with group general manager Vikram Mehta serving as president and CEO.
David Helfrich, managing director of Garnett & Helfrich, says that his firm is interested in the blade server market because of its anticipated expansion. Blade server shipments are expected to grow at a compound annual growth rate of 57% through 2009, at which point the market will stand at about $10 billion, according to market researcher IDC. Of that expected growth, between $1 billion and $2 billion will involve blade server infrastructure, which means that the Nortel spinout could be looking at 2009 revenue of up to $600 million just by retaining current market share.
To reach that goal, however, the company could benefit from expanding its customer base. IBM and HP are certainly blue-chip clients, but they also are the company’s only clients. The company also is maintaining a strategic and financial relationship with Nortel, even though it had its pick of the engineering talent during a recent group reorganization. Sources suggest that various branding issues might have convinced Nortel to maintain a significant equity position, while others say the move was more a result of how much cash Garnett & Helfrich was willing to provide.
Mehta believes that the Nortel relationship is more than just legacy. “If you look at the proprietary hardware of the future, blade server systems are running Nortel VoIP software connected to the outside world using blade server switches,” he explains.
Mehta also says that his company can achieve growth by selling value-added consulting for network integration and planning. If successful, he said, the 30% market share could grow to 40%, which could mean up to $800 million in just a few years.