Is EMC ripe for the picking?

Dell doesn't seem to have the finances to move up the data center stack in one fell swoop, but Cisco does

With EMC healthier than it's been in a long time, some industry observers believe it might be ripe for the picking by vendors looking to shore up their data center vertical stack of products.

In a conversation this week with Computerworld, Dell executives did not rule out the possibility that the company could purchase EMC.

Travis Vigil, Dell's executive director of product marketing for enterprise storage, would not speculate on whether the company would renew its reseller contract with EMC, which runs out in 2013, saying only that it would continue to care for its joint Dell-EMC customers.

Asked if EMC could be a target for acquisition by Dell, Vigil's tune changed, saying M&As in the "enterprise space" are very likely.

"Eight enterprise acquisitions in the last year. We've publically said acquisitions are part of our growth strategy and the focus has and will continue to be in the enterprise space," he said. "Specifics beyond that I can't say."

Most industry observers agree that EMC and Dell's 10-year-old reseller partnership is over once its latest renewal contract runs out in 2013. With Dell's purchase of midrange SAN vendor EqualLogic and high-end SAN vendor Compellent, co-opetition between the companies has shifted to straight-forward competition.

Further evidence of the rift between the companies came to light when EMC recently launched its its line of VNX arrays that combined file and block-level data storage, and EMC CEO Joe Tucci said in no uncertain terms that Dell would not be a reseller of them.

"If we were using a marriage analogy, I'd say they are pretty much officially separated with irreconcilable differences and they're waiting for divorce papers to be filed," said Brian Babineau, an analyst with market research firm Enterprise Strategy Group. "They have children that they'll continue to support, but at the end of the day, they're both going to pursue their own interests."

But Babineau doesn't believe Dell is a viable contender to purchase EMC because it doesn't have the finances to pull it off. Buying EMC would also create a substantial overlap in products, he noted.

"Logically, the assets that are most valuable to Dell and that are owned by EMC are VMware and RSA," he said. "Certainly you're not going to be able to carve those businesses out of EMC."

"But I've seen many things in this world happen, so if EMC was more affordable and Dell had access to the capital, you never know," Babineau continued.

Dell's low market capitalization, only $27 billion, hardly puts it in a financial position to purchase EMC, even if the company did report $61 billion in revenue last year; EMC reported $17 billion.

EMC's stock prices, for the first time in a long time, have moved out of the teens. Its stock price has risen by about $5 since September, and it's currently trading at about $25.50, giving the company a market capitalization of roughly $53 billion.

Over the past couple of years, some industry pundits have speculated that Oracle or Cisco would be an appropriate suitors for EMC.

Oracle with a market cap of $152 billion is more than healthy enough handle such a sizeable buyout.

However, the rumors that Oracle had been considering an acquisition of EMC fizzled out quickly, especially in light of its buyout of Sun, which it is still working to integrate. Cisco, on the other hand, remains a very likely candidate.

"Cisco could use a strong storage company. That's the one that has the money and the wherewithal to get server, storage, virtualization and security together in one fell swoop," said Arun Taneja, founder and president of market research firm The Taneja Group.

For one, Cisco has been pushing itself further and further up the data center product stack. In 2009, Cisco launched its Unified Computing System (UCS) with its own line of blade servers.

Cisco and EMC have also partnered to develop prepackaged data centers known as "Vblocks," which would include Cisco's networking equipment, EMC's storage arrays and VMware's hypervisor technology.

The companies also put together a joint service venture called Acadia, which was later changed to Virtual Computing Environment (VCE). It aims to help users and system integrators build VBlock data centers. VCE just established its headquarters in Richardson, Texas, and is hiring 434 people.

Over the past two years, Cisco has made no bones about its intention to get into the storage space. Infonetics Research released data this week saying that Cisco lead the market in storage switch sales growth, bolstered mainly by the Fibre Channel over Ethernet (FCoE) protocol.

Last year, the company also launched a line of desktop NAS (network-attached storage) devices, but it has made no moves to get into the midrange or high-end storage arena, which is lead by EMC.

Taneja said that like other vendors, Cisco is looking to move up the data center stack with its products, and one major building block for that strategy would be the acquisition of a strong storage company.

"It doesn't have to be a hostile takeover as long as the price is right," he said. "But is Cisco capable of doing a hostile takeover? You and I both know Cisco is capable of being merciless."

Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian or subscribe to Lucas's RSS feed . His e-mail address is lmearian@computerworld.com.

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