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Larry Ellison to buy EMC?

Rumeur du merde

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Whimsical Wall Street analysts, eager investment bankers, and maybe a few pump-and-dumpers are presumably behind the chatter that Larry Ellison, who is synonymous with software powerhouse and server wannabe Oracle, is interested in buying disk-array giant and VMware owner EMC.

That's a good one, right? Almost as good as Microsoft buying Adobe, which was last week's rumeur du merde. The funny thing about these rumors is that they drive stock prices, and at one point today EMC's stock price was up over 5 per cent based on the chatter.

Ellison is rich, but he had better pick the pockets of Bill Gates and Warren Buffett if he wants to do such a deal. Because there is no way Oracle will get anywhere near acquiring EMC — the best that could happen is that the two companies would merge. And even that seems highly unlikely given that Ellison, Oracle's co-founder and CEO, has the largest stake in Oracle and would significantly dilute his holdings in the combined firm. If Oracle and EMC merged, Ellison would have to share control of the combined company with Joe Tucci, EMC's president, CEO, and chairman. In a fair fight, my money is on Tucci — and maybe in an unfair one, as well.

The Wall Street Journal reported the musings of Wedbush analyst Kaushik Roy, who told the paper that rumors have been going around Wall Street about Oracle being interested in acquiring EMC for its storage and server-virtualization wares. Both Oracle and EMC declined to comment, of course.

Just for fun, let's throw some numbers around and put some cold water on this talk. Oracle has a market capitalization of $143.8bn as Wall Street goes to sleep on Thursday afternoon. The company has $12bn in cash and equivalents and another $11.6bn in marketable securities, which is a sizeable sum. But the company also has $17bn in long-term debts and notes, which means Oracle really has $6.6bn in cash after blowing $5.4bn net of cash to acquire Sun Microsystems in January. Oracle can't buy anything anywhere near as large as EMC unless it takes on more debt and issues lots of stock, diluting current shareholders and messing up its balance sheet.

And honestly, Oracle needs to pay off some its debts. Somebody is just a few billion dollar deals away from living beyond his means.

Valuing EMC is a bit problematic because it also owns an 80 per cent stake in VMware — and don't get me started on how brilliant, like The Producers asinine it is for a public company to be able to sell a piece of itself to the public all over again when they already owned it through EMC shares.

As the market closed, EMC had a market capitalization of $41.7bn. The company has $5.8bn in cash, a little more than $1bn in short-term investments, $3.5bn in long-term investments, and no debts.

None. Nadda. Zip. Zilch.

So assuming that Wall Street is valuing EMC while considering that $10.3bn cash hoard, the company is worth $52bn without any premium at all. The other way of looking at it is that EMC is only worth $31.4bn after you take the cash out of the market cap — that's how I think about it.

Now, VMware ended the day with a $32.2bn market capitalization, has $2.8bn in cash, and owes EMC $450m in notes. That would imply, if you think about it logically, that EMC's 80 per cent stake in VMware (which should be part of its stock price) is worth $23.5bn net of cash, and that makes the non-VMware portion of EMC — all the data-storage and data-management stuff, the backup and recovery software, the document-management applications, and even the new Greenplum data-analytics appliances — worth a piddling $7.9bn.

Oracle can afford to buy that. And maybe even pay a nice tidy premium of 50 per cent. But you can bet Larry Ellison's last dollar that this is not the math that Tucci and Co. would use to value EMC and/or VMware. ®

The smart choice: opportunity from uncertainty

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