M&A Real-Time Analysis: Why would Cisco want to buy EMC

Because they have to get into the adjacent markets. Well it is still IT and eventually how does it matter, to even the IT geeks, if the stuff is in the network or storage or some sort of abstraction layer (which you and I fondly call virtualization). Cisco's chief John Chambers has said again and again, as if to convince the board members that "a mega-acquisition has just gotta happen or else we'll die", that earnings will erode over time as the world goes to a much on-demand computing.

Update: This news from Bloomberg today(dated 5th August,2008) is enough for the shareholders to be convinced that a "natural adjacent merger or acquisition" is the best thing that can happen to Cisco, surely EMC has a lot to gain from this deal as well. This is the best way both chiefs can handover the helms to their successors as well.

The obvious dangers of the on-demand computing is that the sales guys will not be able to sell anymore, at least not the kind of stuff that they sold in the past. The real, tangible stuff, we call hardware with all those processors and disks all jammed in. Obviously the stuff to be sold will be done by some smarter folks, meaning the versatile consultants or what I often call here versatilists (coined by Gartner, to be fair here). So good-bye sales guys and welcome the savvy consultant (a hard find by the way). This is again not going to be enough in a market where competition is rising, cost-cuts intensify and customers are too busy looking for quick gains and even tying up with newcomers.

Anyways so the problem (err..challenge) is pretty much clear. Cisco (and others as well) knew this long time ago. Cisco has gone for a bid long time back. Looking at this news article from July 2005:

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.

So the dilemma here is simple. Cisco gets into yet another fast-becoming commodity market and EMC's five-year long flat revenue gets a 4-week long boost. I think the change in management and eventually someone standing up and doing something worthwhile with some great technologies and acquisitions (including VMware) may be the key to such an acquisition initiative.

Virtualization is a very rich market and a lot will happen as well move towards the clouds. Evnetually firms like Microsoft too are prone to go for some mega-aquisitions such as that of Symantec (I'll explain in another article why that may be interesting for Microsoft and Symantec). Reactive and poor judgement has led to several firms starting to gnaw away at the market share of VMware and EMC as well. That needs to be injected with some fresh blood and visionary leadership.

There is enough to be done. Funny thing is if you compare the analysis of way back then and now, nothing much has changed. Maybe the overgrown bubble, the credit crisis owing to housing sham has only aggravated the spending, surge in oil prices has killed the buying power of the consumers and a devaluation of US dollar against currencies such as euro, 0.99 in 2002 to 1.6 now has made the consumer hard to find a way out of the conventional spending they did way back in past. When HP-EDS deal was announced we knew something had changed. I drew the HW-SW-SI-Sourcing circle quickly to explain why completing the circle is crucial to feed the global market.

Globally Deliverable, Converged Services

What happens in such an acquisition spree is that firms have to take major risks to advance towards the converged business model. This has to then be delivered over the internet, via Cloud Applications and Services or whatever we'll call it when we get there. As you can see clearly that Cisco is just looking at that very single quadrant we call HW, just in this case, with VMware and other software houses such as RSA, Documentum etc it also sneaks gradually towards the SW quadrant. HP-EDS's deal has been scorned at and a lot of dropouts were/are expected but eventually we don't know that may be the best thing that HP ever did.

It is not so much about making a statement by doing the multi-billion dollar deal but it is about the walling-in that firms have to watch out for. The market cruch and continued consolidation eventually means that too many players will be a thing of the past.

So should Cisco buy EMC, the answer maybe yes and maybe, but the eventual answer may still be yes. It is not easy to be found naked in the alley where things are being sold dime a dozen, the commoditization of services will eventually render stuff like networking, OS, etc hardware absolutely irrelevant. The talks could very well mean to take ownership of VMware but EMC may want all of it to be sold, to which Cisco may have objections.

Bottom line: No matter what the issues may be, it is time to realize that the consolidation is the law. Should you be driving it or be driven by it. The goal is far greater, it is to serve the community driven, highly aspirational global market.