Making Room for Data Gen Is Daunting Task for Storage Giant EMC

Corporate cultures are bound to clash when storage maker EMC attempts to mold its underachieving rival in its image.
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EMC's

(EMC)

hard-charging sales force takes no prisoners. That aggressiveness may rankle rivals, but it has helped feed a decade of breakneck growth for the enterprise storage giant's stock.

Now the fast-growing storage maker has to mold underachieving rival

Data General

(DGN)

in its own image. That could be tough even for EMC.

The Hopkinton, Mass.-based company announced Monday it would acquire its smaller neighbor, based in nearby Westboro, Mass., in a stock deal valued at $1.1 billion. Last year, Data General reported a loss of $150 million on $1.5 billion in revenue. The company is expected to remain in the red in 1999.

By contrast, EMC reported net income of $793 million on $4 billion in revenue.

EMC's rosy view is that Data General will help it become a player in the mid- and low-range storage business, but some industry watchers say don't believe the hype. This is by far EMC's largest acquisition to date, and skeptics think EMC may have trouble integrating Data General into a corporate culture that's on track to post 35%-plus year-over-year earnings and revenue growth for the second year in a row. Data General, which just began a massive internal restructuring program, is currently sporting a flat year-over-year revenue growth rate.

"If I was EMC, I would be concerned about taking my eye off the ball," says Dick Search, vice president of marketing at

Hitachi Data Systems

, who was at

Digital Equipment

when

Compaq

(CPQ)

bought the company for $9.6 billion last year. "It's not only a clash of cultures, but EMC doesn't have much of an acquisition track record."

While Search admits he isn't the most objective of sources -- Hitachi currently makes storage products for EMC rival

Hewlett-Packard

(HWP)

-- he adds EMC may do its best work in-house. "EMC bought

Epoch Systems

in 1993, and we never heard from them again," he says. EMC bought Epoch, an advanced client/server storage player, in a stock deal worth $120 million.

Merrill Lynch

hardware analyst Steven Milunovich fears that the two companies' profit margins just won't add up. "Even if Data General can grow at 20% next year, EMC will need to grow by 40% for the combined company to rise at what is expected by the Street to be a 35% growth rate," says Milunovich, who rates EMC a buy. His firm has performed no recent EMC underwriting.

Mark Fredrickson, EMC's director of global public relations, says Data General's CLARiiON storage unit "should have little trouble working with EMC's units," but the server division, the AViiON unit, will remain separate. That may be because EMC knows little about running a server division.

But despite Data General's poor recent track record, EMC remains gung-ho about its future prospects. When asked how an unprofitable Data General products fit into EMC's mix of storage systems, Fredrickson replied: "EMC doesn't manage unprofitable businesses."

As part of the purchase, EMC agreed not to spin off or sell AViiON for two years, but Milunovich says in an analyst report on the deal that by then AViiON "won't be worth selling." According to Milunovich, AViiON server sales will account for $560 million in revenue this year as compared to $440 million for the highly touted CLARiiON storage unit.

New Storage Business Credo: Consolidate and Conquer

EMC needed to defend its 55% gross profit margins and to respond to competitors that are rapidly trying to cash in on the exploding demand for high-capacity data storage systems, which is being fueled by a surge in Internet use.

The world market for data storage on computer disks totals $30 billion currently, according to market researcher

International Data

, and is expected to grow to $45 billion within five years.

In spring, a slighted H-P said it would no longer need EMC's products because it was looking to Hitachi Data Systems, a subsidiary of

Hitachi

(HIT)

, to supply it.

IBM

(IBM) - Get Report

has signed a multiyear deal with upstart storage seller

Dell

(DELL) - Get Report

and announced plans to buy struggling storage and computer maker

Sequent

(SQNT)

for $810 million. Last week, IBM said it had agreed to buy

Mylex

, which makes controllers and adapters used in data storage systems, for $240 million.

And the deals keep coming:

Sun Microsystems

(SUNW) - Get Report

and storage seller

StorageTek

(STK) - Get Report

agreed to sell each other's products in a multiyear deal Wednesday.

Faced with rivals bulking up, EMC, which sports a $54 billion market valuation, had to enter the fray.

"It looks like you are going to see more aggressive posturing from all the big boys," says an IBM storage executive who spoke on the condition of anonymity. "EMC now wants to regain its market leadership in the enterprise storage space." After all, says the IBM executive, "we are the largest storage makers in the world."

Farid Neema of

Peripheral Concepts

, a storage industry consultancy, says the acquisition forces EMC into a tough political battle. "It may end up that companies like Dell may look elsewhere to find their product," says Neema. Dell gets much of its storage products from Data General's CLARiiON division. He adds that Dell, once its Data General deal expires, may instead look to IBM for storage supplies.

Of course, EMC's crackerjack sales team, which often puts in 60- to 70-hour workweeks, will be called in to invigorate Data General's sales force. "After you get married, that's when you usually find out who snores and who steals the covers," says Hitachi's Search.

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