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Emerson shells out $1.2bn for Avocent

Locking down data center dough

Emerson Electric - the conglomerate that has power, process, climate control, and industrial automation businesses as well as appliances and tools that it peddles - will soon have a bunch of hardware and software gadgetry to sell now that it's agreed to pay $1.2bn to buy server management vendor Avocent.

Under a deal announced today, Emerson is paying $25 per share to buy Avocent, representing a 22 per cent premium over Monday's closing price. Avocent's shares and sales have been struggling since the beginning of the recession in the United States back in late 2007, and that was one reason Mike Borman, who used to run IBM's partner channel and who worked at Big Blue for all but a couple of years when he was chief executive officer at Blue Martini Software, was tapped to be CEO at Avocent in July 2008. At the time, Avocent's shares were trading in the $40 range, which seems like a million years ago for a lot of companies in the IT sector.

Avocent is a dominant supplier of switches used to link system administrators to racks of servers, known as KVM switches and short for keyboard video and mouse. In February 2006, Avocent bought its main KVM rival, Cyclades, for $90m and two months later the company paid a whopping $416m to buy the LANDesk PC management and security software business from Intel. Avocent's flagship product is a remote management tool, called DSView, that can deal with physical and virtual server infrastructure and manage the power that they consume.

Avocent has been moving out from KVMs to do more power management and offer data center services to help companies better manage their power consumption, and this fits with Emerson's Network Power division, which generated $2.6bn in sales in 2008 out of the company's total $24.8bn in sales. Emerson already sells secure server racks and power distribution systems, uninterruptible power supplies, and access controls for those racks.

The company also peddles precision cooling gear for data centers. With Avocent, Emerson now has an appliance business that lets it control servers in the data center, which leaves servers, storage, and networking to the tier one players who pretty much own those markets.

The question is whether Avocent is worth $1.2bn. Avocent had sales of $657m and had an operating income of $118m, but revenues are projected to drop 17.8 per cent to $540m and operating income will fall 23 per cent to $91m. (About 78 percent of Avocent's sales came from its system management tools, with the remainder coming from the LANDesk PC management tools.) Net income for Avocent fell by 44.5 percent in 2008, to $25.5m, and in the first six months of 2009, Avocent has lost $63.3m on $254.7m in sales.

At the end of the June quarter, Avocent had $107m in cash, which shaves down that $1.2bn price tag a little. The KVM market was worth about $1.2bn in 2008, according to a presentation put together by Emerson, and Avocent had a little less than half of the sales.

Emerson can afford to buy Avocent, seeing as it has $1.38bn in cash. But Emerson has been eating into its own cash over the past year, and has watched as its sales and earnings get crunched by the economic downturn. For the nine months of fiscal 2009 ended in June, Emerson's sales were down 14 per cent to $18.1bn and net earnings were off 30 percent to $1.7bn.

But Emerson says that the ability to control the data center room and rack environments at the 10,000 large data centers in the world (for data centers with 10,000 square feet or more of floor space) represents an incremental $1bn in revenue opportunity, and that justifies the premium it is paying. And there is some business to be had at the 35,000 midrange data centers and 140,000 small data centers of the world, too. But the relatively high price tag that Emerson is paying for Avocent is probably aimed as much at discouraging hostile counter offers from some of the server players as it is at making Avocent shareholders happy.

In a conference call with Wall Street analysts, David Farr, Emerson's president, CEO, and chairman, said that the deal is expected close around January 1, 2010, subject to the approval of Avocent's shareholders and government regulators. He added that for the nine months of Emerson's fiscal 2010, Avocent's sales are expected to be around $400m and that Emerson would take a 10-cent hit to earnings per share as Avocent was merged, including amortization, acquisition costs, stock compensation, and so on, and that Avocent would add to earnings in fiscal 2011.

Farr also hinted that Emerson would be reaching out to the top three server makers - Hewlett-Packard, IBM, and Dell - to work on DSView systems management tools that work in conjunction with the hardware they sell into data centers. Considering that all of these vendors want to sell their own tools, this could be problematic, but then again, no one server maker sells a set of tools that properly span different server types and makes. Maybe Emerson will be the first. ®

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