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Tuesday, June 06, 2006

Method To EMC's M&A Madness

It is common knowledge that most high tech mergers fail, barring some exceptions. The exceptions are very significant in that good thinking and great action brings in admirable results. As compared to to other recent high profile software industry mergers, you'll agree that there is a method to EMC's M&A "madness", writes Dave DeWalt. Fully agreed. As I wrote recently,"EMC is executing brilliantly and clearly positioning to win the game. Results are showing up impressively – 13 quarters of double digit growth is what the company has witnessed in these challenging times. He emphasized that companies needs to change from within and question established models, respond super fast to remain successful. No doubt EMC’s software growth is impressive and Dave wants a supersonic flight built so that he can travel to India more often with less time – this demand will find good support from most other top executives in software companies. Dave's message - EMC is executing well, has big plans, is profitable, growing well and is a trusted partner for customers".

Dave highlights in his note, that the dynamics involved in merging two separate organizations and coming out on the other end a sum greater than the two parts is no easy task. Despite being different type of companies, he writes, Documentum is now a thriving part of EMC Software - a roll-up of more than 20 successful acquisitions over the past three years. He attributes the success coming out of a focused methodology that starts with identifying the right target companies and doesn't end until years after the merger is completed. Attributing proactive actions on acquisition, assessment of core Vs Context, building in flexibility through acquistions, acquiring scale, ability to push acquired products across the globe and the like claims Dave, goes inside for assessment before a decision to acquire is made. His writing about EMC'S 3A's - Alignment, Accountability & Autonomy as the binding philosophy for post integration. He hits the nail on its head when he writes that finance officers and bankers are always focused on the financials, analyzing how the acquisition is accretive to the business and the potential return it will deliver while overlooking two other critical areas - employees and customers. Virtually all of the assets of the acquired company sit with the customers. The ability to seamlessly integrate the two companies and their products, instill confidence in the merged entity and retain customer satisfaction will greatly contribute to the success of a merger. Ignoring these customer-related aspects will spell disaster.In the same way that customers represent a company's revenue potential, employees hold the passion and emotion of the business. If they leave, that spirit goes with them. He argues that a significant percentage of M&A deals that fail do so because the merger caused key employees to leave. He is spot on when he writes that merged companies can absolutely gain by optimizing the costs related to real estate and duplicative functionality - but only where the benefit outweighs opportunity cost.
We have to agree with Dave - when we look at oracle's acquisition strategy not yielding immediate results - after all after spending 14 billion and acquiring 13 odd companies, oracle's stock appears as a petrified one quoting under 13$ - previous peak 15$ in 2002
. In the last two years-since the acquisition spree started in earnest-sales are up 24%, net income is up 26% and the company's cash flow from operations is up 18%. The stock has never been this cheap since 1990 on a pure P/E [price-to-earnings ratio] basis . While one may agrue that the scale of acquisition are not comparable, in reality it will just be an argument against well thought out success standing tall against bravado and impulsiveness. EMC would stand more tall if it begins to innovate faster and better.

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