Transaction Alert -- EMC / RSA Security

Jun.29.06 | About: Dell Technologies (DVMT)

EMC continues its acquisitive ways with the announcement of the intent to purchase RSA Security today.

Target: RSA Security

RSA, while reasonably modest in size at $322mm in revenues, has an outsized impact on the security industry. The RSA encryption standard, created by RSA, has become the de-facto standard for authentication to ensure secure access to corporate computers (SecureID Authentication) and is widely used to ensure secure on-line commerce. RSA also hosts the security industry at it's annual RSA Conference. RSA, while dominant in its niche, has not really been able to break out of a rather slow revenue growth mode. Revenues only grew by 1% from 2004 to 2005 although top-line is projected to grow by 20% from 2005 to 2006.

Deal Terms

Total Consideration: $2.3 billion ($28.00/share)

Premium to market: 45% above pre-rumor price

Valuation Multiples:

Aggregate Value / 2006E Revenue 5.7x

Price/2006E Earnings Per Share 44x

Strategic Rationale

EMC is wrapping it's "managing the lifecycle of information strategy" around the transaction. EMC's spin is that they already manage the information via their suite of storage products and Documentum, the document management application they purchased a couple of years ago. Now the are simply managing "secure access" to that information via the RSA Security product set.

Architect Partners Assessment

This was a very expensive deal for EMC for, at best, a moderately attractive asset. The other rumored bidders may have lost the battle but may be better off for it. EMC will will no doubt rationalize the purchase price by claiming that growth will accelerate substantially under the EMC umbrella but by all measures we believe RSA shareholders are the winners here. We've pondered EMC's rather unorthodox software strategy many times. While acquiring RSA, from a very big picture perspective, can be rationalized, we wonder how much real synergy exists with their existing businesses. We frankly felt the same way about the Documentum acquisition and EMC has apparently made it work, at least financially. We're still not convinced that was a great strategic fit either unless the strategy is really just a revenue growth strategy. While the strategy has been rather confusing to us, we do take our hats off to EMC for their excellent execution post-acquisition on their software acquisitions.

BusinessWeek did a good article on EMC's acquisition success. Dave Dewalt also recently posted an interesting piece on this very subject. Here is a good summary of Wall Street's reaction by Steve Hamm at Business Week.