boston.com
EMC seen as possible takeover candidate
Slide in market value rekindles speculation
By Ross Kerber, Globe Staff, 10/14/2002
The continuing slide in the market value of EMC Corp. has rekindled speculation that the Hopkinton-based data storage industry leader may be a takeover candidate.
Tough price competition and a plunge in demand for EMC's powerful storage devices have sent shares in the company down 73 percent since January. EMC's earnings are due out Thursday, but the company has already warned it doesn't see any recovery in demand soon.
Shares in other storage-equipment makers such as IBM Corp. and Hewlett-Packard Co. also have fallen, but not to the same extent. Although EMC boasts advanced storage technology and a large installed customer base, most of its competitors are more diversified technology companies that can rely on other business lines, such as personal computers, printers and services, to offset slumping storage sales.
''The lower EMC falls [in market capitalization] relative to potential acquirers, the more interesting, or more vulnerable, they become,'' said Jo Tango, a venture capitalist at Highland Capital Partners who specializes in the storage industry.
Tango suggests that Dell Computer Corp. and Cisco Systems Inc. could each be interested in buying EMC, to gain access to new markets.
Bear, Stearns analyst Andrew Neff, meanwhile, has suggested Hewlett-Packard Co. would benefit from buying its data-storage rival, an idea that Hewlett-Packard no longer dismisses, as it did in August.
Jason Pedersen, an investment banker who works on data storage deals at Thomas Weisel Partners in San Francisco, thinks a more likely outcome would be to combine EMC with a software company such as BMC Software Inc. or Computer Associates International Inc. Some of these potential combinations might be structured as ''mergers of equals'' now that EMC's shares have fallen, he said, and would help the resulting company focus on the higher-margin data storage software business.
The two biggest factors working against an acquisition, Pedersen said, are uncertain demand for EMC's products and that EMC's shares are still expensive relative to the meager earnings it is expected to post in 2003. ''On an absolute earnings basis, you could still argue they're not that cheap,'' he said.
Speculation that EMC could be snapped up emerges at least once a quarter in the fast-moving storage sector, but the company has never signaled it is for sale. Even at its reduced price, EMC remains the most valuable technology company headquartered in Massachusetts and, with around 7,000 workers in the state, one of the largest employers.
None of the companies mentioned as possible buyers of EMC would discuss their interest. An EMC spokesman, Michael Gallant, suggested EMC isn't looking for an exit strategy.
''A company needs differentiated products, great service and maybe most importantly, stamina, to weather this IT spending environment,'' Gallant said. ''We've got all three, and we're more than prepared to ride this one out alone,'' he said.
At a trade show in Chicago last month, EMC chief executive Joe Tucci gave no indication he is wavering in his strategy of cutting costs while building up EMC's software portfolio. The company remains on track to grow its revenue from software to 30 percent of overall sales by 2004, and its revenue from technology services to 20 percent, Tucci said, with the rest coming from sales of date storage equipment.
EMC's share price shows its competitive position is in decline, however. On Friday, EMC's shares climbed 45 cents to close at $4.61, giving it a market capitalization of around $10 billion. By way of comparison, the company was worth around $25 billion in March when, in an interview with the Globe, Dell president Kevin Rollins said his company was unlikely to buy EMC because it was too expensive.
Since then Dell's shares have risen slightly, and its current market valuation stands at around $68 billion. Another factor that could help a buyout is that EMC has $5 billion in cash on its books, an amount that could be used to offset the price a buyer would have to pay for the company's shares.
Tango and others see Dell as a potential acquirer of EMC because the two companies already cooperate on manufacturing and sales operations. Neither EMC and Dell would make executives available last week to discuss the progress of their partnership or the likelihood of a buyout. An EMC spokesman said the company will disclose more information about its dealings with Dell along with its third-quarter results Thursday.
Yankee Group storage analyst Jamie Gruener says he doubts potential buyers of EMC are in a hurry to do a deal. Dell already has the access it wants to EMC's technology, he noted, while HP is still digesting its acquisition of Compaq Computer Corp. Representatives of Dell, IBM, BMC, Cisco, and Computer Associates all declined to comment on their interest in EMC.
In August, HP spokesman Mark Stouse dismissed the idea of buying EMC, calling it ''not something that's in the cards right now.'' But on Friday, Stouse declined to repeat the remark. A bid for EMC, he said, is ''something I can't speculate on,'' he said.
Ross Kerber can be reached at kerber@globe.com.
This story ran on page D1 of the Boston Globe on 10/14/2002.
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