Resignation of FalconStor CEO ReiJane Huai could signal shift in strategy, or possible sale

Channel partners say the departure of FalconStor CEO ReiJane Huai could benefit the storage software vendor if it results in new business strategy; the move could prompt vendor to put itself up for sale.

The resignation of FalconStor CEO and founder ReiJane Huai presents the storage software vendor with a chance to go in a different strategic direction, which its channel partners welcome.

Huai resigned Wednesday after disclosing that improper payments were allegedly made in FalconStor's contract with a customer. Huai also served as FalconStor's chairman. FalconStor's board named Chief Strategy Officer Jim McNiel as interim CEO and interim president; CFO James Weber becomes the interim chief operating officer; and Director Eli Oxenhorn becomes non-executive chairman.

FalconStor sells storage management and data protection software, mostly through storage OEM and resellers. The vendor has struggled over the past year, losing a great deal of its revenue from strong OEM partners EMC Corp. and Sun after EMC acquired data deduplication specialist Data Domain to replace FalconStor software with its backup devices and Oracle acquired Sun. But even before that, FalconStor had a reputation as having solid technology but flawed marketing. Industry insiders say McNiel is better suited to marketing the company and perhaps positioning it for an acquisition. Huai was believed to favor FalconStor staying independent rather than putting itself up for sale. When Huai and McNiel were at Cheyenne before Huai started FalconStor, McNiel was considered the driver behind Cheyenne's acquisition by Computer Associates.

Greg Knieriemen, vice president of marketing at Chi Corp. -- FalconStor's largest U.S. reseller -- said he has faith in McNiel's ability to lead the company although there is no indication whether he will remain the permanent CEO.

"Rei's a great guy; he's great with the channel and was very supportive," Knieriemen said. "But I like what Jim brings to the table; he's a different guy than Rei was. His wisdom and vision for FalconStor is encouraging. While the circumstances are disappointing, I have complete confidence in FalconStor."

Sam Lee, solution architect at FalconStor reseller Force 3, agreed with Knieriemen's assessment of Huai.

"FalconStor is a great company in terms of technology," Lee said. "Rei's a strong technologist; he's a real geek. I think they have enough technology to be an interesting storage vendor, but their reliance on an OEM model hurts them."

As a software vendor, FalconStor competes with storage hardware vendors that often sell their own software as well as FalconStor's.

"FalconStor sells controller software," Lee said. "The industry is hardware-based. From the end-user side, nobody wants to buy SAN controller software. I want to buy a terabyte of storage, not software that I have to buy hardware to put it on. FalconStor's replication is really good. If it had fairly robust storage hardware, it can compete against Tier 1 guys like HP, EMC and NetApp on a certain level. But it doesn't have the hardware."

Kaushik Roy, a financial analyst for Wedbush Securities, said the change in CEO could make FalconStor a more likely acquisition target, especially after the stock price dropped from more than $4.50 a share in January to less than $3.00.

"If the products are good, then acquirers should be looking at FalconStor now," he said. "Companies would be hesitant to buy somebody with accounting issues, but at least prospective acquirers should be doing their due diligence on FalconStor's products/markets/customers. Should it turn out the problem was restricted to the CEO, FalconStor could be an attractive acquisition target."

Roy said CEO scandals shouldn't impact the company's products or customer base, "although it does have a negative impact on the operations and morale in the near-term."

Chi's Knieriemen said he thinks the change can be good after the initial shock.

"This presents an opportunity for FalconStor," he said. "There's a different vision than was in place before. It doesn't make it better, or make the old vision wrong, but the change in leadership is an opportunity to do something different."

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