EMC (EMC) pulled off an amazing string of 17 acquisitions in the past three years without stumbling, and all the while analysts cheered. But the cheering stopped abruptly on June 29 when the data-storage giant announced a $2.1 billion takeover of data-security leader RSA Security (RSAS).
In a conference call announcing the deal, analysts hammered away at EMC executives—calling the price too high and faulting the transaction for not boosting EMC's profits enough. "I'm not sure how investors can conclude this is a good deal for EMC," said Keith Bachman, an analyst at Banc of America Securities. "The economic realities don't seem to match in any way the strategy you've outlined."
"THEY'RE DEMANDING IT." The analysts have a point: EMC paid five times RSA's expected revenues, a premium price, even though RSA is forecast to grow about 21% this year, to $375 million. Also, RSA isn't expected to boost EMC's earnings per share until after 2008, EMC executives said. The company says it will gain three cents per share in EPS in 2008 on a non-GAAP (generally accepted accounting principles) basis.
EMC Chairman Joseph Tucci forcefully defended the aquisition. He said it's vital for sustaining EMC's strong position in data storage and for providing a boost to the company's already double-digit revenue growth. He projected that EMC's previously small security business will grow to $500 million in 2007, by combining EMC's products with RSA's and channeling them all through EMC's 2,000-person-strong sales force.
Tucci said it's vital for EMC to have a strong security portfolio. "Customers aren't asking us to do this," Tucci said. "They're demanding it. And they don't want security bolted on. They want it woven in."
COMPETITIVE BIDDER. In an interview with BusinessWeek after the press conference, Tucci showed his frustration with Wall Street. Analysts have been urging him to increase his buybacks of shares to boost EPS. He's doing some of that, but says it's not sufficient. He needs to build the business, too. "There's a lot of short-term thinking out there, and we have to plan for the long term," he said.
Tucci agreed that the price was high, but he said that was necessary. Another company was in the hunt. "This is critical technology, and we're not the only ones that saw that," he said. "Not having this technology would put us at a severe disadvantage. The other company would not have shared it with us."
Tucci did not reveal the name of the other company, but a source familiar with the deal says it was security giant Symantec (SYMC). The two companies have gone head to head in mergers and acquisitions before. In 2003, EMC made the deal to buy fast-growing software upstart VMware while Symantec was pondering a purchase, according to a Symantec board member. Symantec officials could not be reached for comment.
RUMORS DENIED. Not all analysts hate the RSA deal. Technology Business Research, a tech industry market research firm, put out a quick report calling it a "very smart acquisition" because it was vital for EMC to provide a comprehensive portfolio of security products for its corporate customers. While the price wasn't cheap, "EMC chose the right company, in the right area, at the right time" according to TRB's note.
News of the acquisition was first revealed in a New York Times story hours before it was announced. The Times story said RSA had put itself on the market. Interviewed after the press conference, RSA Chief Executive Art Coviello denied that. "EMC came calling. Originally we wanted to do a partnership, but they were relentless about buying us," he said. Coviello will now head a new security business unit at EMC.
EMC spent $4.7 billion on acquisitions since 2003 to help transform itself from a storage hardware maker into an information management company (see BW Online, 7/10/06, "The Fine Art of Tech Mergers"). This deal continues the transformation. But, based on the reaction of Wall Street, Tucci won't likely do another one of this size any time soon.
Hamm is a senior writer for BusinessWeek in New York
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