HP to buy EMC? We think so, say Wall St money men

Thigh rubbing financial analysts see so 'many reasons this makes sense'


An HP and EMC merger still seems like a fanciful sticking plaster to heal two tech giants, but financial analysts in the US are advising that such a transaction not only looks logical but more likely.

Wall St money men spent last week analysing HP’s direction in the corporate enterprise following the Discover event in Las Vegas, and are supportive of what would be the biggest tie up in tech history.

“HP to buy EMC? We think so,” said Brian Alexander, director of technology research at investment services biz Raymond James.

He said a buy would beef up HP’s cloud portfolio with VMware and Virtustream services, while EMC and Pivotal would boost the converged infrastructure and analytics side of the portfolio. Mobility goodness for HP would come from VMware AirWatch.

“While management’s messaging around the size of M&A in HP Enterprise continues to refer to Aruba as a benchmark, CEO Meg Whitman explained that from an academic perspective, technology hardware is an industry that should consolidate due to declining revenues and slowing growth rates,” he added.

In HP's latest set of results, Q2 ended April, it reported declining sales in each division, though Enterprise Services was hardest hit. EMC sales grew by low single digits in its Q1, but the classic storage busienss was looking hard pressed.

Veteran analyst Alexander reckons pro forma financial leverage of a deal is manageable at a $32-33 per share takeout price, which is less than three times EBITDA.

“There are so many reasons this makes sense,” said Alexander.

HP is splitting the enterprise divisions from the PC and print side of the business, and is 80 per cent closer to getting that done for a 1 November start date. Whitman has indicated further acquisitions are in the pipeline but one as big as EMC?

The storage desk at El Reg has ruminated and cogitated about a coming together between the two rivals, and concluded from a portfolio perspective - 3Par aside - that it makes sense. Analysts agree.

Investment banking and financial services advisor Macquarie Research reckons that with a VMware spin-off ruled out by EMC CEO Joe Tucci, the best option to increase EMC's share price is a merger with a systems vendor. He ruled out Cisco due to cooling relations over VCE.

Rajesh Ghai, enterprise IT analyst at the firm, noted EMC and HP had “kicked each other’s tyres last year and decided not to proceed” largely because of price, but said the split at HP made a deal more likely.

“HP Enterprise - the enterprise part of HP - will be a lot more aligned with the current EMC and VMW businesses in terms of end-market focus and selling motions, which will enable the revenue and cost synergies across the two organisations to be a lot more apparent.

“We also believe the worsening secular backdrop and the trends towards software-defined architectures and pubic/hybrid cloud may also compel the two parties to do a deal,” he added.

Macquarie Research said a merger would yield cost “synergies” of at least $2bn, and that HP would “probably” end-of-life 3Par storage over time, and EMC would shelve its Content Management biz in favour of HP’s Autonomy.

Of course, all of this is analyst research and advice, the only people that can make this happen are the relevant execs and institutional shareholders.

But financial analysts were also heavily in favour of HP separating the PC and print elements from the rest of the organisation, and we all know how that went… ®

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