Will IBM Acquire EMC?

Merger speculation reached new levels of madness this week, perhaps spurred on by the Hewlett-Packard Co. (NYSE: HWP)/Compaq Computer Corp. (NYSE: CPQ) deal and the feeling that no matter how hare-brained a merger might sound, these days "you just never know."

The rumor du jour is that IBM Corp. (NYSE: IBM) is in talks to acquire EMC Corp. (NYSE: EMC). While this one's been doing the rounds for months, it's finally reached a point where several analysts are preparing what if” reports on the subject. (None ready for publication yet, sources say.)

Could it be true? Would a merger between these two even make sense?

“However preposterous or reasonable it might be, I am not going to comment on it from any angle,” said Mark Fredrickson, communications director at EMC. IBM wasn’t quite so animated. “We do not comment on rumor or speculation,” said an official.

On the whole, Wall Street analysts think it’s pretty unlikely the two would get together, although they point out that IBM, with a market cap of about $160 billion and plenty of cash in the bank, could afford EMC. The storage giant’s stock price has plummeted from over $100 a share last year to just over $11 today -- giving it a market cap of around $26 billion.”IBM is one of the few big companies out there in a position to seek great companies at the right price,” says Harsh Kumar, analyst with Morgan Keegan & Company Inc. “It has plenty of cash and its stock has held up well." Still, he's skeptical: "Financially, this deal is possible, but still unlikely. With a bit of effort and money ploughed into its storage business, IBM could take EMC out in the marketplace.”

Another Wall Street analyst who covers storage but declined to be named asserts that integrating EMC’s service organization into IBM Global Services would be perceived as impossible by the market. “Both stocks would be decimated for it,” he says. “The cost of the acquisition would be astronomical and the market perception negative.” He concludes that EMC is far more likely to use its cash to fend off any unsolicited attacks. According to its recent financial statements, EMC has $3.5 billion in cash and $2 billion in cash equivalents.

Another major stumbling block to a hypothetical acquisition would be its effects on EMC employees. In any acquisition, companies run the risk that staffers might bolt when they perceive their personal investment in the firm to be diminished by a major change of direction. Even in today's tight market, it's clear that employees who may have joined EMC for its lead in the field could be alienated by finding themselves part of a larger, more diverse organization.

As a case in point, sources cite what happened to ConvergeNet when Dell Computer Corp. (Nasdaq: DELL) acquired it about two years ago. Out of 120 ConvergeNet employees, about two remained at Dell, according to insiders at the company.

Incidentally, there are also rumors about Dell and EMC. Both companies have denied it publicly, although some think it would make more sense than IBM-plus-EMC (see EMC, Dell Deny Alliance Rumors).One reason the rumor mill continues to grind, some say, may be that IBM is seen as ready to try anything to regain its credibility in the storage market.

That credibility has been faring poorly lately. According to Gartner/Dataquest, last year EMC took 45 percent of worldwide revenues for OS/390 RAID storage (that’s storage attached to IBM servers), compared to IBM’s 29 percent. That's enough to make Big Blue turn red.

Then there’s the Shark problem. Shark is IBM’s storage array that competes with EMC’s Symmetrix line -- and it is about as shark-like as a cod, according to people familiar with the technology. “Symmetrix eats it for breakfast everyday,” says Kumar.

Clearly, IBM could do with some help, but few people see EMC caving in. "I don’t see EMC selling out to IBM," says Steve Duplessie, analyst at the Enterprise Storage Group Inc. He adds, “IBM should try to buy Hitachi Data Systems and give EMC a legitimate competitor."

Now there’s a rumor with some merit!— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com