MSI's Incestuous Marriage

The merger of ManagedStorage International Inc. (MSI) and Front Porch Digital seems like an odd marriage, until you realize the bride and groom are closely related [ed. note: or should that make it more odd?]

Digital archive management software company Front Porch Digitals plan to buy storage service provider (SSP) MSI for $39 million in stock brings together two companies run by Tom Sweeney (see Tom Sweeney, President, CEO, and Chairman, ManagedStorage International). Sweeney was the chairman of Front Porch Digital and the CEO of MSI, and the merger might be a last ditch attempt to keep both afloat as a new company called Incentra Solutions.

Sweeney will become Incentra’s CEO and chairman. [Ed. note: You were maybe expecting Donald Trump?]

Although it was announced as an acquisition by Front Porch, an SEC filing indicates the deal would likely be accounted for as a reverse merger, with privately held MSI acquiring publicly traded Front Porch, and then achieving a reverse IPO. Incentra will be a public company.

Sweeney says the merger will more than double the revenues of Front Porch, which reported $2 million in revenue last quarter and $1.5 million in the first quarter of the year. When Front Porch announced earnings last week, Sweeney said it was cash positive in the quarter for the first time, even though Front Porch lost $510,000. And during the same quarter last year, Front Porch lost $3.2 million.The merger gives the new company approximately $7.5 million in unrestricted cash. Front Porch reported only $1.3 million in unrestricted cash after last quarter, so most of the money comes from MSI.

What do the two companies have in common? MSI is one of a handful of SSPs looking to make it in a market that hasn’t lived up to the hype surrounding it three years ago (see MSI Reports EBITDA-Positive Q3 and MSI Seeks Acquisitions). Front Porch Digital sells software and services that convert multimedia files into digital formats for archiving.

The newly formed Incentra will be based in Boulder, Colo. and run as two divisions. Sweeney will head the MSI division, which will continue to offer services and operate out of Broomfield, Colo. Front Porch will become Incentra's broadcast and media services division, led by Front Porch president Michale Knaisch out of Mt. Laurel, N.J. A company spokesman said all employees from both companies will be retained for total of 88.

Incentra will also have offices in Toulouse, France; and London. Still, exactly how it all plays out remains to be seen.

“If Tom Sweeney’s fingerprints weren’t on both companies, I’d be scratching my head over this one,” says Gartner Inc. analyst Adam Couture. “I don't see any great synergies between the two. MSI claims to be profitable, and it’s certainly in position to make an acquisition. This just wasn’t the one I expected.”While the emphasis appears to be on services for media and post-production entertainment companies, Couture says Front Porch’s software might be massaged into a compliance play as well, since it can find, tag, and distribute documents. Like other SSPs, MSI would like to cash in on the compliance market.

Another question mark hangs over the entire SSP value proposition. Though several SSPs, including AmeriVault Corp., Arsenal Digital Solutions Worldwide Inc., EVault Inc., and LiveVault Corp., claim to be doing well, the market is a far cry from what industry analysts expected a few years ago.

In 2001, forecasts called for storage service revenues to reach as high as $10.5 billion in 2005 (see SSPs: RIP). Couture says he doesn’t think any SSP has hit $10 million in annual revenues on its own yet, although this could be the year at least one of them cracks that mark.

“For a while, analysts were predicting [SSP] to be a really hot market, but it didn’t turn out that way,” says Mike Fisch, The Clipper Group Inc.'s director of storage and networking.

So now the market has a new player -- or at least a new name -- in Incentra Solutions.— Dave Raffo, Senior Editor, Byte and Switch