The Network Hub

May 20 2008   7:58PM GMT

Wall Street insiders float idea of a Cisco and EMC merger

Shamus McGillicuddy Shamus McGillicuddy Profile: Shamus McGillicuddy

Either it’s wishful thinking or some keen insight. Yesterday Eric Savitz, the west coast editor of Barron’s, speculated that Cisco Systems might try to buy storage giant EMC Corp. He wrote that Paul Wick, manager of the Seligman Communications and Information Fund, a tech industry investment fund, told him that Cisco is overdue for a megadeal and that EMC is a perfect target.

A Cisco-EMC deal would probably lead to a big day on Wall Street, so it makes sense that the investment world would float such a rumor. Heck, it might even get the two companies talking. Perhaps Cisco CEO John Chambers and and his EMC counterpart Joseph Tucci read Savitz’s piece yesterday and have booked a TelePresence chat to toss the idea around.

Regardless of whether Cisco and EMC might take it seriously, many blogs in the tech universe are atwitter about the idea and for good reason. Cisco has $24 billion in cash, which is probably enough to grab EMC, with a market capitalization of around $35.5 billion.

Cisco has made no secret of its interest in transitioning from a networking vendor to an overall IT vendor. Buying EMC would make Cisco the leader in enterprise storage technology. It would also have a controlling interest in EMC software subsidiary VMware, the leader in virtualization, and RSA, EMC’s powerful security division. Cisco executives speak openly about the company’s interest in expanding its market position in both the virtualization and security industries. And Cisco already owns a a 1.5% stake in VMware.

Savitz says his source has no idea if such a deal is even being discussed between the companies, but Cisco has the cash to spend. It has set ambitious growth goals for itself, even though it’s already the dominant market leader in its core business – routing and switching. And EMC stock has been stagnant for awhile now (other than a brief boost late last year when VMware had a highly-publicized IPO), much to the consternation of its shareholders. A Cisco deal would no doubt cheer up EMC investors.

The question is – Is this good for the industry? Investors might like the deal, and it makes a whole lot more sense than a Blockbuster-Circuit City marriage. But how would the merger be handled? Would the world’s biggest networking company be capable of managing the world’s biggest storage company? How would a such a deal affect smaller players such as VMware, which has clearly benefited from a hands-off approach by EMC executives? Sometimes $30-to-$40-billion tech industry mergers don’t work. Just ask Dan Hesse, CEO of Sprint-Nextel.

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