1+1=2 is certainly better than 1+1=1.5 (see IBM/Hitachi disk drive deal) but not as good as 1+1=3 (see Microsoft/Great Plains deal).
Your point about buying specific product lines instead is worth following.
BMC has two main product lines plus five new product lines in the areas of Linux, storage resource management, security, SAP/CRM application management and subscription services.
Enterprise Data Management (EDM) includes BMC's very popular database monitoring tools and utilities products which account for around 60% of a $1.2B market. BMC is particularly strong in the mainframe DB2 database market while EMC is equally strong in the mainframe DB2 and Oracle database markets so this product line is highly complimentary to the EMC solution set. Some of EMC's own database utilities include InfoMover, CopyCross, and the DB2 extractor. These can benefit from the additional functionality provided by BMC at the higher layers of the enterprise software stack.
TTM revenue for EDM is around $575M.
Enterprise Systems Management (ESM) includes BMC's entrenched MAINVIEW (mainframes) and PATROL (distributed systems) systems management frameworks. Both EMC and BMC participate in each other's open API programs so EMC's storage solutions are regularly integrated into MAINVIEW and PATROL. In particular, BMC's ACSM (application-centric storage management) module stands to benefit immensely from EMC's ability to add firmware and develop applications at the server level, the storage network level and the storage array level. BMC writes software in a classic fashion -- server-based with agent-based hooks into the hardware. EMC's ability to make portions of the software application run in hardware time adds extra dimensions to BMC's solutions.
TTM revenue for ESM is around $531M.
TTM revenues for the 5 new product lines are around $87M.
I can see how BMC's two main product lines are very attractive to EMC and I think they can put up the cash and stock to close the deal if EMC thinks that the cultures will fit. EMC has a habit of working closely with its acquisition targets before acquiring them and it has certainly done so with BMC, mostly recently in the area of Virtual Tape.
Here are some interesting comparative numbers from Yahoo:
TTM Revenues PSR CAP
CA $3.0B 3.4x $10.2B
BMC 1.3B 3.4x 4.4B
Veritas 1.5B 7.6x 11.4B
EMC 6.1B 2.9x 17.7B
EMC ex-hardware 2.4B 2.9x 7.0B
WHAT IFS
I. EMC ex-hardware PLUS BMC
a) IF PSR=2.9x 3.7B 2.9x 10.7B
b) IF PSR=3.4x 3.7B 3.4x 12.6B
c) IF PSR=7.6x 3.7B 7.6x 28.1B
II. EMC PLUS BMC
a) IF PSR=2.9x 6.1B 2.9x 17.7B
b) IF PSR=3.4x 6.1B 3.4x 20.7B
c) IF PSR=7.6x 6.1B 7.6x 46.4B
The current groupthink about the commoditization of multi-processor cached storage hardware is the main cause of the mispricing of EMC's software and services business. Drawing on the current server business for a parallel, the Wintel platform accounts for nearly 90% of unit shipments but only 50% of industry revenues. This means that the other 10% of industry unit shipments account for the other 50%. This makes more sense if you bifurcate server hardware into a performance-sensitive back-end or core and a price-sensitive front-end or edge.
Anyway, as mentioned, EMC controls 26% of the total external storage hardware business, including 39% of the fastest growing segment: networked storage. It also controls 30% of the storage software business, including the two fastest growing segments.
Veritas, the current storage industry valuation multiple leader at 7.6x, is heavily exposed to the slowest growing segment of the storage software market (read: lumpy growth ahead soon) with 40% market share. Veritas also controls 70+% of the Unix volume management/file system market primarily Solaris. This accounts for its runner-up position (~14%) to EMC (46%) in Storage Infrastructure, the largest storage software market segment.
It appears, however that IBM, HPQ and Microsoft are methodically playing off Legato against Veritas so that they continue to feed off the Solaris carcass, err, installed base while they maneuver to squeeze Veritas out of their next-generation products based on their next-gen file systems. The multiple does not appear to discount that medium-term risk.
The larger point is that a merged EMC/BMC would most likely result in a higher multiple for EMC so the deal will depend on how EMC assesses the compatibility of the two corporate cultures and the willingness of a seemingly weary BMC management corps to sell given a reasonable range of probable rewards. |
