Report: Stars Are Aligning For HP-EMC Merger

With Hewlett-Packard set to split in two and EMC facing pressure from an activist investor, the time is right for HP to buy EMC, according to a research report from investment banking firm Raymond James.

"Stars are aligning for HP to buy EMC," said the report from Raymond James analysts Brian Alexander and Adam Tindle. "We continue to believe that an acquisition of EMC by HP is more than a distinct possibility, as HP strives to increase shareholder value following its tax-free spinoff in November, while EMC deals with a high-profile shareholder activist (Elliott Management) and a standstill agreement that expires in September. Both stocks continue to languish, and we believe shareholders of both companies would earn substantial returns if a deal is consummated."

EMC shareholders could receive a 25 percent premium, while Hewlett Packard Enterprise could achieve 50 percent earnings per share accretion, according to a detailed financial analysis of a potential deal in the report. "This would translate to approximately $33 per share and allow EMC CEO, Joe Tucci, to retire with shares trading at a 14 year high," said the report.

[Related: What Now For EMC? Many Possibilities After HP Deal Nixed]

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The research note resurrects the possibility once again of what would be one of the biggest mergers in high-tech history. Last September, The Wall Street Journal reported that EMC for nearly a year held "off and on merger discussions" with Hewlett-Packard.

The possibility of such a deal comes with EMC under intense pressure from activist investor Elliott Management, which agreed to a nine-month standstill in its battle to break up EMC after getting two of its representatives on the EMC board in November.

HP, meanwhile, is poised to split into two independent Fortune 50 companies, with a road show set for the September time frame.

"Our high conviction centers on key strategic, operational, financial and leadership benefits that would accrue to HP, as well as the motivation for EMC to sell rather than dismantle the federation or risk a potential proxy fight when its standstill agreement expires in Sept.," said the research report. "Put simply, we see reasons for both sides to come together."

HP and EMC would not comment.

EMC shares were trading at $26.02 in midday trading, 16 percent off a 52-week high of 30.92.

HP shares were trading at $29.98 midday, down 27 percent from the 52-week high of $41.10.

The report assumes $1 billion in cost synergies with a major opportunity for HP to "rationalize EMC's cost structure."

HP and EMC partners said the deal makes sense given the activist investor pressure that EMC faces from Elliott Management and the Hewlett Packard Enterprise signal that it will engage in merger and acquisition activity with $7 billion in cash once it becomes its own independent business effective Nov. 1.

"EMC has to do something," said a top executive for an EMC partner who did not want to be identified. "They are getting their heads handed to them by Pure (Storage) and Nimble (Storage)."

One HP partner, who did not want to be identified, said he believes such a deal is likely given that both HP and EMC are at a critical juncture. "Meg Whitman is not going to stand still while the industry is moving this fast," said the executive, pointing to Whitman's one-time blockbuster acquisition of PayPal in 2002 when she was CEO of eBay.

Rich Baldwin, chief information officer and chief strategy officer at Nth Generation Computing, a San Diego-based solution provider and longtime HP partner that has competed against EMC for years, said he relishes the possibility of the two rivals' become one.

"I'd guess 25 to 50 percent of HP customers, maybe more, run some EMC storage," Baldwin told CRN. "I've had customers who don't want to change their storage. They get comfortable with existing solutions. A lot of the largest enterprises have had EMC for 10, 15, 20 years. It's a monster effort to change. We've had a couple small wins, but usually EMC swoops in with big discounts to win. But I have customers who tell me they wish I sold EMC. I think my sales team would be excited."

While Baldwin, as an HP partner, gives HP the edge over EMC in terms of storage technology, he said EMC appears to have a better post-sales services organization. "I've had to compete against EMC service," he said. "If something from EMC breaks, they get people out there fast. I've lost a few deals because of service issues."

On the other hand, Baldwin said, EMC has historically demanded premium pricing from customers. "HP has not played hardball as much as EMC," he said. Getting RSA security and VMware cloud and virtualization technology would be a coup for HP, Baldwin said.

Another longtime HP solution provider responded via email anonymously to CRN that HP and EMC have looked at coming together several times, and with Tucci looking to retire, such an outcome is now more likely.

However, given the resulting "mishmash" of storage products from such a merger -- including such brand names as Avamar, Data Domain, StoreOnce, VMAX, VNX, XtremIO, 3Par, XP, MSA and LeftHand Networks -- it would take a long time to rationalize the line, the solution provider wrote. "Confusion leads to paralysis by customers on existing deals not wanting to commit to a product that may/may not have a future. Big financial risk," the solution provider wrote.

Also, the EMC sales force has a different DNA than HP. "(There will be a) lot of cultural conflict. You’d be taking on a lot of people when you’re trying to streamline the company," the solution provider wrote. Ownership of VMware by HP would be contentious, and it's possible the Department of Justice might force HP to sell it off, the solution provider said.

"To me, a few years ago, when IT was still living in stove pipes, it made a lot more sense for HP to look at buying EMC. Today? With the flash vendors (Pure, Tegile, Nimble) and the move towards hyper-converged architectures (like Nutanix) it makes a lot less sense," the solution provider wrote.

The leadership team of a merged HPE and EMC would likely see EMC's top executives leading the company, Raymond James reported.

Tucci, who is already nearly three years past the day he was originally scheduled to retire, would find the merger a way to cap his career, while Whitman may find in the merger a convenient exit strategy, according to the report.

Raymond James said that Pat Gelsinger -- currently president and CEO of VMware and former heir-apparent of the top spot at his former employer, Intel -- would be a "compelling" choice for CEO of HP Enterprise.

David Goulden, currently CEO of EMC Information Infrastructure and former EMC chief financial officer, would be a top candidate for HP Enterprise chief operating officer, Raymond James said.

The top CFO candidate would be Zane Rowe, EMC's current CFO and formerly the CFO of Continental Airlines when it merged with United Airlines, according to Raymond James. Rowe's chances of getting the CFO position at Hewlett Packard Enterprise were strengthened when Cathie Lesjak, who originally was to be the CFO at HPE, recently move to be CEO of HP Inc., Raymond James said.