Did EMC Overpay?

So much for EMC avoiding any blockbuster acquisitions.

EMC CEO Joe Tucci probably regrets the "string of pearls" description of EMC's acquisition strategy he made earlier this month at analyst day. (See EMC Nets nLayers, Scopes Security and EMC Acquires nLayers.) The analogy referred to smaller companies EMC has been gobbling up to complete its storage portfolio as well as expand into network management and services.

Tucci has also cautioned against big deals in the past, saying they present great product and corporate integration hurdles. That was the EMC mantra when Symantec consumed backup software giant Veritas last year. (See Vulnerable Veritas.)

So Tucci had some explaining to do Thursday after EMC said it would pay $2.1 billion for RSA Security. Analysts pressed him hard for justification during a conference call, and EMC's share price plummeted today in reaction.

Tucci said the opportunity was too good to pass up. He hinted that an EMC rival was also hot on RSA's trail, driving up the price and urgency of the deal.

"This was a missing piece in our infrastructure puzzle," Tucci says. "This is critical technology. Not having it would have put us at a severe disadvantage."

RSA's other suitor remains unidentified, although Wall Street analysts have guessed Hewlett-Packard and Symantec. The more pressing question is whether the deal makes sense for EMC from technology and business standpoints.

One thing that is not surprising is that EMC made a security buy. EMC executives have identified security as a major product priority for more than a year. The marriage of security and storage has been a common theme since the $13.5 billion Symantec-Veritas deal. (See Symantec & Veritas: It's a Deal.) EMC rival Network Appliance bought encryption vendor Decru for $272 million a year ago, and a slew of storage vendors have moved to include encryption in their products recently. (See NetApp Buys Decru, Review: Tape Encryption Devices, and Backup Encryption Mulled.)

RSA will become EMC's Information Security Division, run by RSA CEO Art Coviello. Although RSA does encryption, most of its revenue comes from authorization products that determine if a user can access a server or desktop. Like encryption, authorization is considered a key piece of any security strategy.

According to technology analyst Charles King of Pund-IT, EMC and RSA are a better fit than Symantec and Veritas, which he sees as a defensive move against Microsoft. King says EMC and RSA share customers throughout the enterprise IT space, especially in financial services, healthcare, and government. He expects EMC will eventually offer security as an add-on for all its storage systems. "RSA is seen as the gold standard of corporate security, so EMC is getting a known entity."

But even gold has its fair price, and investors suggest EMC overpaid for its new nugget. EMC's shares traded at $10.65 yesterday afternoon, down $.60 from Thursday's close. EMC's shares today were at their lowest price since September of 2004.

Analyst Aaron Rakers of A.G. Edwards believes the deal raises questions because of the purchase price, the integration challenges, and the possibility of distracting EMC away from its core business. "We are becoming increasingly concerned that EMC is spreading itself too thin," Rakers wrote in a note to clients today.

Another analyst says EMC faced the same issues when it bought companies such as Documentum and VMware that were outside its core business. (See EMC Cops Documentum and EMC Gobbles VMware.)

"I see more of a fit than other people see," says Steve Berg of Punk Ziegel & Co. "Surely, there's more of a fit than Documentum was at the time. If EMC is a hardware company just selling boxes, they're in trouble in bad times when the market turns down. If they can give you more than just boxes, they have protection against down times."

— Dave Raffo, News Editor, Byte and Switch

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