EMC Could Deal Investors a Weak Hand
EMC is well versed in the merger game. But even experienced players can get caught with a bum hand.
A big corporate-technology provider struggling with slowing sales growth, EMC has reportedly entertained merger discussions with at least two peers who are in the same boat. Talks seem to have advanced the furthest with Hewlett-Packard, and at least some chats have been held with Dell, The Wall Street Journal reported. So far, nothing has come of such talks.
All three of these companies are trying to figure out how to juice their sales growth, and maybe they figure that bigger could be better. And big is certainly what any such combination would be: EMC's market capitalization is around $60 billion. So getting together with H-P, for example, would make for the largest tech merger on record, according to data from Dealogic.
But a deal of this size and this type would bring with it all the risks associated with huge business combinations. And the rewards would be less certain: Two slow-growth giants are unlikely to combine into a faster-growing one.
EMC is clearly shopping for options, though. It has activist hedge fund Elliott Management on its share register and agitating for change. Elliott's efforts focus mostly on getting EMC to spin out its VMware business as a separate company.
The odds on that happening are long, though, given EMC's continuing resistance to the idea. And rather than splitting, EMC's history is that of an acquisitive company, having announced nearly 50 deals in the past five years alone, according to FactSet. It also isn't above writing big checks, with at least eight $1 billion-plus deals under its belt.
More likely than a spinoff is EMC putting its sizable cash flow to work picking up new growth opportunities—in part to counter similar moves by rivals.
SAP's surprise acquisition of Concur Technologies for $8.3 billion, announced last week, may trigger a new wave of deal activity among large tech firms looking to add more sources of growth to their portfolios of businesses.
But these deals wouldn't be cheap: The price paid for Concur equated to an estimated 10 times forward sales, a record for SAP, according to Nomura.
What is clear is that EMC is considering several different paths. The pending retirement of Chief Executive Joe Tucci, due early next year, provides some impetus for change. But investors should be wary of options that offer high risk for an uncertain reward.