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Cisco in talks to acquire EMC?

Summary: Word has it Cisco is considering a $43 billion acquisition of EMC. With all the storage mergers going on, is this possible?

When Sun Microsystems announced that it would acquire StorageTek for $4 billion a couple of weeks ago, most people rubbed their eyes in amazement and read the news again. As for Symantec buying Veritas, no one in their right mind had put these two companies together. They were just so different.

But getting into adjacent markets is the name of the game these days to sustain the strong revenue growth that's come to be expected of large technology suppliers. Two companies gobbling up adjacent and emerging market players faster than you can say "storage virtualization" are Cisco and EMC. (We'll come back to the v-word later.)

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Strategic Vendor Series: EMC 

What's interesting about some of the companies Cisco and EMC are acquiring is that they overlap each other.

EMC recently acquired network management software company Smarts for $260 million while Cisco has forked out over $400 million for Actona Technologies, FineGround and TopSpin – all considered storage networking companies at one stage or another. Brocade too, recently took its first steps into a new market outside of storage buying server provisioning company Therion Software.

However, buying a little bit here and little bit there gets you incremental growth but not dominance, which is why the rumor that Cisco is in talks to acquire EMC for $43 billion, might just be worth considering.

A quick look at the numbers shows that Cisco can easily afford to buy EMC. Cisco has a market capitalization of just over $121 billion and $24 billion in sales while EMC has a market cap of $32 billion. Buying EMC for $43 billion represents about a 30% premium, pretty steep but not out of the question.

From Cisco's perspective
The San Jose-company has saturated the networking market, but still has to grow. However, its choices are limited. Microsoft owns the desktop. The server market is commoditized by IBM, Dell and HP with IBM taking the lion's share of the services business. This leaves storage, which happens to be the only growth area left.

Buying EMC would give Cisco another chunk of the enterprise and tremendous sway with customers. Its mantra for some time has been that users want fewer suppliers to deal with and products from companies that they can be sure will be around a year from now.

Cisco would also like to see as much functionality as possible moved into the network, including storage applications, which it has slowly been tapping away at for a while. With 10 Gigabit Ethernet on the horizon, Cisco might also have its sights set on finally nailing the coffin on Fibre Channel, to bring storage networking and data networking together over the same pipe. Buying EMC could put an end to Fibre Channel diehards Brocade and McData in one fell swoop. There'll be no such thing as a SAN company anymore. Cisco would probably say who cares if it's IP or FC or telephony anyway, as long as it's always available, secure and runs everything?

From EMC's perspective
The company's shareholders get a healthy premium. Looked at another way, what is EMC's risk in not doing this deal? It may be at the top of its game right now, but what does the future hold? Can it really be a major software player outside its customer base in an industry where proprietary barriers to heterogeneity are still significant? Can it ultimately triumph in the midrange, which is clearly going to be the heart of the market for at least 5 years, against more technically and commercially aggressive players?

Before the going gets tough, EMC CEO Joe Tucci has the chance to sell the company to Cisco, exit on a high note and probably earn himself a fat $200 million or so in the process.

Who wouldn't want VMware?
Returning to the topic of virtualization, Cisco will undoubtedly be licking its lips at the idea of owning server virtualization leader, VMware. This business, owned by EMC, reported first quarter revenues of $80 million -- that's a year-over-year increase of 104% in a brand new and rapidly growing market.

But in the grand scheme of things, virtualization should not be a separate technology for storage and for networking and for servers as this adds complexity for users. It should be a single technology. Owning VMware would give Cisco the opportunity to create virtualized servers, storage and networking under one umbrella -- in other words a very powerful, long-term play.

Do users benefit?
Like Sun's justification for buying Storagetek and Symantec's for buying Veritas, Cisco will argue that fewer suppliers makes purchasing and deploying technology much easier for users.

By acquiring EMC, Cisco might also be able to pull off storage on demand or utility storage, which requires standardization of all the pieces of the infrastructure to make it as simple as turning on a tap.

Then again, all that might not work and users might end up with less choice, less bargaining power and lot of hassle in the process.

More downsides to the deal
Storage could also become a commodity faster than Cisco can absorb EMC -- thereby driving the company's margins down. There's also a chance Cisco will alienate IBM, damaging a partnership that spans a decade.

Then there's the challenge of integrating these two giants: one on the east coast of the US, the other on the west. And after paying a premium, can Cisco really integrate the two firms to get the efficiencies needed to become a dominant player?

The Cisco/EMC rumor may turn out to be just that, but it seems certain that more large-scale mergers are on the horizon in storage.

Jo Maitland is the news director for If you agree or disagree with what she has to say, please submit a SOUND OFF item above.

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