TechWeek: Brain Dead

Given the uncertainty around Vista's timing, Sherlund says the stock might actually benefit if the company simply concedes the inevitable and announces a firm date. We'll see.

The Price is Wrong?

When EMC bought VMware, a lot of people on Wall Street were mighty skeptical. What does a super geeky vendor of virtualization software have in common with a meat-and-potatoes purveyor of storage gear? As it turns out, quite a bit, and the purchase of VMware, which runs as an independent entity inside of EMC, has been a nearly unqualified success.

If you're an EMC exec, you'd like Wall Street believe that this week's $2.1 billion friendly takeover of RSA will likewise turn the jeers to cheers in short order. That, of course, remains to be seen.

It's clear, though, that investors are very skeptical. Start with the price, at $2.1 billion, EMC is paying five times fiscal 2007 earnings and 52 times 2007 earnings. At $28 a share, the purchase represents a premium of 45% over the previous day's close. Most commentary on the buy called the premium larger than expected, but EMC execs claim it's only a bit higher than the upside that other security companies have earned.

CA, for example, paid a premium of about 40% when it bought Netegrity in 2004, says Dennis Hoffman, vice president of info security at EMC.

Hoffman calls the acquisition "top-line driven" and "technology driven." RSA's encryption and authentication technologies will form the core of a new division within EMC. "If we hadn't purchased them, we were going to lose the chance to partner," he said in an interview. A number of other companies were bidding; although EMC won't say who the rivals were, both CA and Symantec(SYMC Quote - Cramer on SYMC - Stock Picks) were rumored to be in the running.

When the deal was announced, EMC said that on a GAAP basis, it would hurt earnings by 3 cents a share in 2007and be neutral in 2008. On a non-GAAP basis, the company expects it to be neutral in 2007 and add 3 cents a share in 2008.

Hoffman argues that storage and security are moving closer together. When people store their data, they want it secured and access has to be authenticated, he says. "It's a natural progression for us," he says.

Not everyone agrees. And that is why the stock hit a 52-week intraday low of $10.11 on Friday, compared with the old low of $10.85. The stock closed the day with a loss of 28 cents, or 2.5%, to $10.97.

Sushil Wagle, an analyst with Seligman Technology, was not a happy investor (his company is long EMC) when news of the deal first broke. "Please, don't buy this company," he said shortly before EMC confirmed the takeover. "Security is an important area for EMC, but RSA and its tokens won't produce synergy."

Similarly, Deutsche Bank analyst Chris Whitmore panned the deal, saying that he foresees "less than 5% ROI on the deal; it's hard to see synergies." Goldman Sachs and Citigroup have investment banking relationships with Microsoft.

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TechWeek Scorecard
Index	Closing	Change
Nasdaq Composite	2172	2.4%
Philadelphia Semiconductor	442	-0.7%
Goldman Sachs Software	155	0.6%
TSC Internet	207	2%

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