EMC Defends 'Strategic' Purchase of RSABy Chris Preimesberger | Posted 07-05-2006
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."
EMC's 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.
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 picturethat "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's 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:
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 VMwarethat 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."
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