EMC’s shares plunged sharply earlier today, but they regained most of their losses before the trading day came to a close.
The reason? To varying degrees, market analysts and major investors are ambivalent, skeptical, or downright hostile to EMC’s announced acquisition yesterday of RSA Security for $2.1 billion.
There are two basic concerns, both of which are entirely valid. The first concern is that EMC overpaid for RSA. EMC will pay $28 for each share of RSA, a 22-percent premium above the $22.88 price at which RSA’s shares closed Thursday, and 45 percent higher than RSA’s closing price Wednesday, the day before RSA confirmed its involvement in buyout talks. In the post-bubble era, that’s a big premium to pay for any acquisition. It is plausible that EMC CEO Joe Tucci and his executive coterie got caught up in the competitive excitement of back-and-forth auction bids. RSA had put itself up for sale, and Tucci says other bidders were aggressively pursuing his catch.
Given that he is compelled to justify the relatively high price he paid to claim RSA, Tucci rationalized that it was both strategically necessary — “RSA wasn’t going to be around” and would have gone to a rival if EMC hadn’t won the bidding, he said — and that the inherent value represented by RSA, which will allow EMC to sell security as well as storage solutions, will be more than worth the nominally extravagant investment.
The other concern is that EMC, which has bought 25 companies in three years as it expanded into information life-cycle management and related software markets, is losing its focus and might not have the wherewithal to digest RSA, which is the largest company EMC has acquired. Again, this concern is entirely valid.
EMC overpaid, no question. The numbers above tell the story. Even if one of EMC’s rivals was poised to take RSA off the table, EMC had other alternatives than to pay a steep premium to win the bidding war. For example, it could have considered buying one or more of RSA’s competitors at a considerably lower aggregate price; not only would that have been easier on the books, but such bite-size acquisitions would have been easier and faster to assimilate.
But Tucci has made his move. He has no choice but to defend and justify it. As for investors and observers, it’s their prerogative to wonder whether other alternatives might have been explored and pursued.