Why Oracle Is Not Likely to Buy EMC Anytime Soon

Why Oracle Is Not Likely to Buy EMC Anytime Soon

Is Oracle indeed plotting to buy the world's largest data protection and storage vendor, EMC? That's the rumor, one restarted by a report from Citigroup analyst Walter Pritchard [referenced here in Eric Savitz's Barron's column], that went careening through the world's business communication channels on Oct. 14.

Yes, this one's surfaced before, and yes, EMC's stock price bumped up 4.5 percent on the day. But most big companies get talked about when acquisition trends start up, which generally happens during upmoves in the cycle of macroeconomics.

For starters, an Oracle buy of EMC would be extremely expensive, considering EMC's $43.45 billion market cap and all that upside for its virtualization and security properties.

Can Oracle afford it? Sure, although a lot of its shareholders might not agree. At least it could qualify for credit, so financing isn't an issue.

The most important way to look at such a merger/acquisition would be to recognize that this would become not just a larger Oracle, but a conglomeration of some of the most powerful IT companies on Earth: Oracle, EMC, VMware, Sun Microsystems, RSA Security, Data Domain, Iomega, PeopleSoft, BEA and Siebel Systems.

And don't forget dozens of smaller but also important companies that continue to do their own things very well under the large corporate umbrellas of Oracle and EMC.

Does the thought of all this horsepower under the control of one ship captain-Larry Ellison-cause people to cringe in places like Armonk, N.Y.; Palo Alto, Calif.; Round Rock, Texas; and Seattle? You can bet on it.

Will something like this happen anytime soon-meaning this year, or even early next year? People in the know say the answer is no. But a year from now, the situation might be very different.

Oracle, EMC: Two peas in a pod

There are a number of similarities between Oracle and EMC:

• They both know how to sell IT.
• They have fiercely aggressive, independent company cultures, led by tough-minded CEOs.
• They relish their status as two of the world's largest and most successful IT companies.
• They believe they are on track to unseat IBM and Hewlett-Packard as the next big full-service systems provider, especially in the cloud computing space.
• They both play hardball in the marketplace and are very successful at it.
• They would rather acquire than be acquired.

That being said, EMC is a public company and stranger things have happened. In fact, Oracle is also a public company; EMC could be just as likely to buy Oracle. The lesson here: Never assume anything.

Analysts and IT managers contacted by eWEEK did not dismiss the idea of an Oracle-EMC merger but generally didn't think it likely, at least in the short term.

"Except for IBM, Microsoft, Cisco, HP and Oracle, I think any technology company is a potential takeover target," Brian Babineau, senior consulting analyst with Enterprise Strategy Group, told eWEEK.  "The real question is: How likely are some of the rumors being floated out in the marketplace?

"EMC is attractive to the mega-cap technology players because of VMware and a huge hardware install base. That being said, they are going to be very expensive, mostly driven by VMware's valuation and growth prospects, and they will be tough to integrate."

The integration challenge comes from the fact that Oracle will have to swallow and digest two operating companies-VMware and EMC-the latter which has several business units that are making acquisitions of their own (Greenplum, etc.), Babineau said. 

"So, is it possible? Yes. Is it probable? Unlikely, in my opinion," Babineau said.

Why Oracle-EMC Merger Makes a Lot of Sense

If you look at the evolution of the enterprise stack, an Oracle-EMC merger makes "a lot of sense," said Ken Male, principal analyst and founder of TheInfoPro, which does research for Fortune 100 companies, vendors and financial services firms.

"We've been talking with investors for the past few quarters about how there are going to be more mergers and acquisitions as companies are looking to build the enterprise stack," Male told eWEEK. "HP is almost there first now, with its strong server play, having bought 3PAR [first-tier storage], ProCurve [networking] and 3Com [networking]. Oracle bought Sun, which was one of the first moves in this trend.

"This is all part of the current evolution in which these companies are looking to have an 'arms race' to build out their own integrated stacks. EMC, the 800-pound gorilla in storage, and VMware, with its 80 percent of the virtualization market, are huge assets that would make a natural fit for Oracle," Male said.

Bottom line: Is this a deal that's going to happen?

"Right now, I'd have to say probably not," Male said. "But if we're having this conversation a year from now and EMC is still a stand-alone company, I'd have to say it would be much more likely."

Analyst Rob Enderle of The Enderle Group told eWEEK that a takeover by Oracle of EMC "would seem doubtful as EMC's leadership is very independent and they aren't facing a major problem that this merger would fix.

"Their opportunities would seem stronger independent of Oracle than as part of them," Enderle said. "The cost of this acquisition would be daunting as well. However, Oracle needs to distract investors from their excessive executive salaries, and sometimes a major acquisition attempt like this will do that."

Oracle still needs to fill gaps

Does Oracle need to be gobbling up more companies? It already claims to be "Hardware/Software/Complete," according to its marketing line.

"They are still light on the hardware side against IBM, who is their long-term rival, and have indicated they would like to buy a chip company," Enderle said. "There is a lot of work going on right now surrounding ARM servers, and they might want to get ahead of that given this is both a direction that Microsoft is exploring and IBM may not want to go."

Enderle added that "Oracle is clearly in the hunt to buy something. [Co-President] Safra [Catz] likes doing acquisitions. Sadly [co-President] Mark Hurd hates them, and that dynamic may make doing them well much more difficult this round as Hurd needs to discredit Safra to get her out of his way. And it is hard to believe that she doesn't see him coming. I expect there is high drama at Oracle at the moment."

Analyst Charles King of Pund-IT told eWEEK that such an acquisition "seems like a stretch to me, though it would give Oracle a far more attractive, innovative and competitive storage line than they acquired in the Sun deal."

EMC leadership positions in storage hardware and software mean the company would sell at a much higher premium than Sun, and its majority stake in VMware would likely be a major stumbling block, given the degree to which Oracle's competitors depend on the technology, King said.

"In fact, if Oracle were to try to move on EMC, it's likely that other bidders with equal or even deeper pockets would enter the fray. I try never to say never, but this seems exceedingly far-fetched," King said.

Oracle, like other large vendors with healthy balance sheets, is helping to drive continuing IT industry consolidation, so King said he doesn't expect the company will halt or slow its shopping spree anytime soon.

"That said, while they claim to be 'complete'-note the lack of 'services' in that marketing statement-if Oracle were to make any sort of dramatic acquisition-and with Mark Hurd now safely onboard, that seems likely-I'd keep an eye on IT services players as potential targets," King added.