Cisco Close to Acquiring EMC

Cisco Systems (Nasdaq: CSCO) could be closer to acquiring my old company EMC (NYSE: EMC) now in light of the recently announced joint venture. On 3 November 2009 San Jose, California-based Cisco Systems, Hopkinton, Massachusetts-based EMC, and Palo Alto, California-based VMware (NYSE: VMW) announced a new joint venture called the Virtual Computing Environment coalition. This venture is based on the new “Vblock Infrastructure Package,” which will provide a private cloud, which is a virtual IT infrastructure, for enterprise size organizations. A Cisco spokesperson explained that the Vblock uses technology from all three companies and that service and support will be consolidated so that customers will only have to make one call to get help with any area of the Vblock.

In light of this new joint venture it might only be a matter of time before EMC is acquired by Cisco. This could make for a really interesting combination; The acquisition of EMC by Cisco has been rumored for years and this move has certainly brought them much closer. In the technology sector, joint ventures are often the way companies get to know each other better before entering into an M&A event. John T. Chambers (CEO of Cisco) and Joseph M. Tucci (CEO of EMC) are very close and had worked together previously at Wang. Furthermore, in light of the recent announcement that HP will be acquiring 3COM, whose core product line is routers and switches, Cisco could also now be feeling under attack. An EMC acquisition could certainly solidify Cisco’s position in the marketplace and strengthen Cisco’s move into the server market. However, a Cisco-EMC merger is possible but it would be a “monster” of a deal to negotiate. It would cost roughly USD 35bn. Cisco would need to believe it was losing market share in its core routing and switching businesses to seriously consider it. The two companies would need to agree on amanagement succession plan and how to handle complications related to EMC’s VMWare ownership. On the other hand, in my opinion the two companies are close enough that a deal could occur at any point.

It is not likely that a Cisco acquisition of EMC would run into any antitrust issues in the US. US regulators have been pretty hands off in deals of this kind. However, given the recent Sun/Oracle obstacles the European environment is different and a potential acquisition might be of concern to European regulators.

Cisco has a market cap of USD 138bn and revenues of USD 36bn for the year ended July 2009. EMC’s market cap is USD 34.47bn and it had 2008 revenues of USD 14.9bn.