2HRS2GO: EMC gets a deal with Data General

If you're an EMC Corp. (NYSE: EMC) shareholder, don't worry about today's market reaction to the proposed Data General deal.

Issuing more than 18 million shares -- in this case, to buy Data General Corp. (NYSE: DGN) -- means short-term dilution for just about any company, so it's easy to understand the drop in EMC's stock price today. In fact, when you consider EMC is increasing the total number of shares outstanding by more than 17 percent, a 5 percent drop today seems mild. That's as it should be, considering the relatively cheap price for Data General.



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Granted, Data General looks shabby at first glance. The company has lost money three out of the last six quarters and is expected to lose more over the next six months. Its server business, which generates half of product revenues, is growing at an anemic pace. And storage system sales through Hewlett-Packard -- Data General's largest OEM partner in storage area networks -- continue to decline.

None of that matters much when the deal delivers growth for the acquirer's core business. EMC is the largest independent storage hardware vendor in the world, with most of its business in the huge, high-end corporate arrays. Data General's Clariion products run in the midrange area, which translates into almost a $15 billion increase in EMC's total market opportunity, to almost $50 billion, if you believe company executives. "EMC wasn't even really there in the mid-range market," says Gruntal & Co. analyst David Takata, who follows both companies.

Clariion generated $400 million in business in fiscal 1998 and continues to grow rapidly. Data General's non-HP storage business is increasing at a 40 percent clip, or faster than EMC's overall growth rate, Takata notes. For that kind of growth on that kind of base -- and Clariion's expansion should accelerate once EMC's larger distribution arm enters the mix -- a price of roughly $1 billion looks very cheap; Takata had the Clariion business alone pegged at a value ranging between $800 million and $1 billion, based on an asset value.

When you throw in Aviion servers and Data General's service unit, you could argue Data General should have held out for more than just a 30 percent premium from Friday's close. But well-regarded technology doesn't erase the company's weak financial history in recent years. Data General already competes with Sun and IBM, and eventually would have found itself with more rivals as EMC came down from the top while Compaq and Dell worked their way up from the low end.

"DG was a sitting duck," Takata notes. "You don't have a whole lot of leverage to negotiate in those situations."

The Aviion servers could be problematic, since they doesn't fit with EMC's basic strategy of being server agnostic. EMC executives believe they can run Aviion as a separate business unit. We'll see if that holds up, but if they change their minds Aviion should fetch a decent price for a buyer looking to penetrate the mid-range server market, since Data General is the leading provider of Intel NT servers ranging between $25,000 and $250,000. If nothing else, Aviion should give EMC a nice foothold among health care systems, long an area of strength for Data General.

So rest assured EMC shareholders. Your company is doing nothing more than buying some sharp technology and a decent market position, using stock currency that's currently trading near its all-time high. The deal won't be immediately accretive, but assuming EMC shows its usual management prowess, you won't even notice by next year.

Other issues:

  • Cylink Corp.
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    Broad market indices were just marginally higher in afternoon trading. The Nasdaq Composite Index was up 1.50 to 2549.51, the S&P 500 higher by 2.02 to 1302.31, and the Dow Jones Industrial Average up 5.70 to 10719.73. 22GO>

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