EMC Defends Strategic Purchase of RSA

By Chris Preimesberger  |  Posted 2006-07-05

EMC Defends Strategic Purchase of RSA

While analysts have been all over the dartboard judging the value of data storage giant EMC's $2.1 billion cash purchase of RSA Security, investors at the New York Stock Exchange reacted very sharply, as EMC's stock price tumbled 7 percent the day after the merger was announced.

"They paid an awful lot of dollars," Steve Berg, an analyst with Punk, Ziegel and Co., in New York, told Reuters. "Will that ultimately prove to be necessary? We'll see."

EMCs stock fell 80 cents to $10.45 in heavy NYSE trading just before the July 4 holiday. The Hopkinton, Mass., company reported 2005 sales of $9.7 billion.

RSA sells keychain-size SecurID devices that businesses use to control access to computer networks. It also has encryption technology that EMC will use to protect data stored on its hardware.

The shares of RSA, of Bedford, Mass., rose $4.35, or 19 percent, to $27.22. It reported $310 million in sales in 2005.

EMC's buyout of RSA could produce one of the most comprehensive data management/security product lines on the market. Click here to read more.

In a June 29 conference call announcing the deal, analysts lined up to fire questions at EMC CEO Joe Tucci and Chief Financial Officer Bill Teuber, arguing that the expensive acquisition doesn't improve EMC's profits nearly enough.

"I'm not sure how investors can conclude this is a good deal for EMC," said Keith Bachman, an analyst at Banc of America Securities in Charlotte, N.C. "The economic realities don't seem to match in any way the strategy you've outlined."

Customers Want Security Woven In

But Tucci told the naysayers that EMC is keeping its eye on the big picture-that "data storage is not complete without top-level security to protect it, and that RSA has one of the best reputations in the business over a number of years."

"Customers aren't asking us to do this," Tucci said. "They're demanding it. And they don't want security bolted on. They want it woven in."

Bob Sadowski, EMC director of marketing for security products, told eWEEK that the deal "is all about identity authentication. We're seeing the focus in security shift from locking down systems to protecting the data itself and authenticating people who access the data. RSA has all that credibility built up and great encryption technology no one else has."

Several analysts to whom eWEEK spoke had varying views on the deal.

"First, I'm really torqued at my broker on this," said Joe Clabby of Clabby Analytics in Boston. "I asked him what he thought about buying RSA back when it was $8 per share, and he said, 'Pass.' He's no longer my broker. ...

"Second, I find this deal curious. On one hand, we've got a security company with market-leading storage software [Symantec now with Veritas], and now we've got a storage company with decent security software [EMC with RSA]. Secure storage is, of course, a must, but shouldn't it be part of a broader picture? For example, an enterprise wants secure systems and storage. EMC doesn't sell systems, so that means they'll sell secure storage and hope a customer wants to run RSA on its systems, too, in order to create a unified environment."

Clabby said he also wonders about some other things:

  • Is this another subsidiary business like VMware, where the acquiree continues to run its own business while being loosely coupled with EMC?
  • Will EMC turn its attention to secure storage now? (The VMware deal really hasn't delivered much virtualized storage to EMC.)

    Click here to read about other acquisitions EMC has announced in recent weeks.

    EMC Vice President of Software Product Marketing Dennis Hoffman answered the questions during the teleconference, replying with an emphatic "no" to whether EMC will approach RSA as it did VMware-that is, to let it run as a quasi-independent company under the wing of the mother ship.

    "We intend to integrate RSA's technologies all through our product line," Hoffman said. "We look at this acquisition entirely differently than the VMware addition."

    "In all our sales now, our chief security officer is getting involved," Tucci said. "In just about every survey of IT, security and storage dominate the top of the lists, as far as needs go. This acquisition frankly fills a big need for EMC."

    Next Page: A billion-dollar business?

    A Billion

    -Dollar Business?">

    "We've had a small amount of revenue in the security area, but now we think this will be a $500 million business for us within a year-and that it will become eventually a $1 billion business," Tucci said.

    Charles King, of Pund-IT, in Hayward, Calif., wrote a special report to clients immediately after the deal was announced.

    "From a strategic standpoint, are the two companies a good fit? Overall, yes," King wrote. "Some analyses of the acquisition have drawn parallels between EMC/RSA and Symantec' 2004 acquisition of Veritas, but the fact is that the deals have little in common besides their principals' interests in storage and security. That agreement was really about Symantec's attempts to bolster itself against future competition (i.e. Microsoft) in its core business."

    EMC and RSA are both well-known names in the enterprise IT space, King wrote, and share common customers in sectors including banking, finance, health care and government. As a result, the pairing incorporates both "interesting existing synergies and intriguing future opportunities for tactical EMC products and services," he said.

    "Over time, we expect EMC to integrate RSA encryption and authentication solutions into its core storage and information management offerings," King said. "In the shorter run, RSA could provide its new parent an entry to potential corporate clients. The former should benefit EMCs existing and future customers, while the latter is likely to set its competitors teeth on edge."

    So is this deal simply a practical pairing of two players whose sum will likely be greater than their individual parts?

    "In a word, no," King said. "Instead, the RSA acquisition says volumes about EMCs perception of both the evolving IT marketplace and the increasingly critical role of security. Recent headlines concerning the loss of a Veterans Administration employee laptop containing thousands of vets records and new revelations about missing VA back-up tapes are merely the latest episodes in a security melodrama that appears never-ending."

    Data with information on more than 26.5 million veterans was stolen. Click here to read more.

    "This is an excellent and strong move by EMC," William Hurley, senior analyst of Data Mobility Group, in Portland, Ore., told eWEEK. "RSA is a leading incumbent that has driven standards, has broad market share and a rich portfolio of technologies, many of which are already integrated with EMC's Documentum assets.

    "Those who are nay-saying this deal are missing the boat on the connection between information, security and real-time intelligence," Hurley said.

    Wall Street's inability to see the value in this and other recent EMC acquisitions is more a statement of that geography's myopia, particularly on the upper floors, than the reality of the needs at street level, Hurley said.

    "In fact, it is the CIOs, CSIOs, compliance officers and lawyers of major U.S. and international banks who have been demanding closer technical interoperation between information management and security solutions," Hurley said.

    The acquisition of RSA fills a vital role in expanding EMC's presence in the IT security business, said David Hill, a principal with the Mesabi Group in Westwood, Mass.

    "Even though everyone realizes that security is important, not everyone realizes how far enterprises still have to go in providing the proper levels of security. EMC has now placed itself as one of the leaders of this key area of information technology," Hill said.

    Was $2.1 billion too much to pay for a $310 million (2005 revenues) company?

    "Wayne Gretsky said, I skate to where the puck is going to be, not where it is," Hill said. "Security is already-and is going to continue to be-a huge market. Vendors that do it right will be able to differentiate themselves from their competitors.

    "So this is a strategic move-skating to where the security puck will be. In a few years all the talk about how high the price was will be forgotten."

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