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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: bob gauthier who wrote (7963)	10/27/1999 10:54:00 AM
From: GVTucker	Read Replies (1) \| Respond to of 17183

Interesting analysis of the DGN acquisition this morning from First Boston. This analyst calculates that the DGN acquisition will add about $1.9 billion in value to EMC. This is in direct contrast to the market's vote so far. If he is correct, then there is decent upside to EMC at this point. Obviously, I have disagreed with the DGN acquisition. I also disagree with First Boston's analysis. The main aspect of this analysis that I disagree with is the calculation that EMC will be able to increase EMC's operating margin significantly, 12% to be precise. In the analyst's model, if EMC ends up growing DGN sales by 'only' 11% and operating margins stay flat, DGN ends up destroying value for EMC, not creating value. Contrary to the analyst's characterization of this scenario as being 'not likely', I consider this scenario to the most likely scenario. For the record, according to First Boston, Clariion revenues declined 18% in '98, and have grown about 9% thus far this year. Operating margins thus far this year are 0%. The First Boston base case assumes that EMC is able to increase sales growth to 18% and operating margins to 12%. the key to me is how operating margin growth is achieved. According to early indications to analysts, EMC will increase DGN gross margin as [direct quote from 1st Boston] "EMC renegotiates low margin Clariion and Aviion contracts, cancels unprofitable Aviion contracts, and drives Clariion sales through EMC's direct sales force." These unprofitable contracts to me are the only reason why DGN has been able to generate any revenue growth at all this year. If EMC cuts them, revenue growth will be harder to come by.