Texas-based PC maker Dell Inc. (DELL) recently announced that it has signed a definitive agreement to acquire privately held Ocarina Networks, to enhance its data management capabilities. Dell expects to wrap up the Ocarina acquisition by the end of this month. They however did not divulge any financial details.

Headquartered in San Jose, Ocarina Networks is a technology start-up company (founded in 2007) selling a hardware/software solution designed to reduce data footprints. With its innovative storage optimization technology, which includes compression and data deduplication, users are able to reduce data storage by streamlining operations. Moreover, it also mitigates data management costs.

During the analyst day, held last month, Dell projected a 20% compound annual growth rate in its Enterprise solutions business over the next three years. It is infact a very optimistic target considering its current product line up and market positioning. We believe Dell will continue to make small tuck-in acquisitions to drive this strategy.

Storage infrastructure worldwide is now under threat from mounting unstructured data such as email, documents, graphics and other media-rich files. Storage management tools such as compression and deduplication reduce storage needs by shrinking redundant data, thereby cutting costs and increasing efficiency.

With the acquisition, Dell will be able to take advantage of Ocarina’s technology to strengthen its EqualLogic enterprise storage solutions. In this context, Dell had acquired storage solution vendor EqualLogic in 2008 for a whopping $1.4 billion.

We are encouraged by Dell’s attempt to shift its focus from PC and server roots to become a data-center vendor with a broad scope. However, Dell has to compete with emerging players in this field such as Hewlett-Packard Co. (HPQ), International Business Machines Inc. (IBM) or EMC Corp. (EMC).

Additionally, the acquisition of privately held Scalent Technology earlier this month is also reflective of Dell’s consistent effort to beef up its enterprise solutions portfolio.

Though potential IT spending, market share gains in the healthcare industry and a high growth forecast for the PC industry are positives for Dell, we remain concerned about competition from Hewlett-Packard, Apple Inc. (AAPL), IBM and Microsoft Corp. (MSFT). Dell’s relative weakness in emerging markets as well as its high debt level also poses as a risk.

We maintain our short-term Hold rating on Dell shares, which equates to a Zacks # 3 Rank.

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