2 Reasons for Oracle to Buy EMC

On Thursday, The Wall Street Journal reported that Oracle (Nasdaq: ORCL  ) is contemplating a bid for data-storage specialist EMC (NYSE: EMC  ) , whose shares rose by 5% for the week.

Apparently, nothing surprises investors when it comes to Oracle CEO Larry Ellison. But is this really a legitimate rumor? Oracle has been an aggressive acquirer, sure, but Ellison has a history of using cash for deals. On that basis, he can't afford EMC.

Oracle had $23.6 billion in cash and short-term investments versus $17 billion in debt as of the end of August. Any bid for EMC would have to include a big chunk of new Oracle stock. As a current shareholder, I'm not so sure I'd like that.

Filling a product need?
Yet there are legitimate reasons for Oracle and EMC to be talking. Data storage and analysis is essential for tech infrastructure. That's why Hewlett-Packard (NYSE: HPQ  ) bid big for 3PAR when it was still under the direction current Oracle co-president Mark Hurd. It's also the reason IBM (NYSE: IBM  ) spent $1.7 billion to acquire Netezza.

The difference here is that 3PAR and Netezza serve distinct segments of the storage market. EMC, meanwhile, is the heavy, a disk manufacturer that also develops and sells software. The company owns 80% of VMware (NYSE: VMW  ) , too.

What makes this combination interesting is the Oracle products that President Mark Hurd is charged with selling: the Exadata database machine and the Exalogic server, which Ellison has referred to as "cloud computing in a box."

Both look like cabinets filled with server technology acquired from Sun Microsystems. But they also have a need for storage capacity (i.e., Exadata), and virtualization software (i.e., Exalogic), two things EMC specializes in.

I'm still unconvinced that there's enough of a technical and financial fit between these two, but when it comes to Ellison's acquisition strategy, I've been wrong before.

Now it's your turn to weigh in. Should Oracle buy EMC? Please vote in the poll below and then leave a comment to explain your thinking. To get the latest news on EMC, add it to My Watchlist.

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Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of IBM and Oracle and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is watching the leaves turn. Slowly.


Read/Post Comments (3) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 16, 2010, at 9:33 PM, TerenceFL wrote:

    It would be a good match-up if Oracle were good at mergers, but they are not. I don't believe either the Sun or Peoplesoft acquisitions have really brought value to Oracle the way they should have. Oracle enjoys a much better net margin than the hardware makers like HP and EMC, so any deal will not only dilute the stock price in the near term but lower the overall margins long-term. If they could make some synergy out of the deal it would be worth it, but their track record says "No".

  • Report this Comment On October 17, 2010, at 4:59 AM, Contrite111 wrote:

    EMC is not the right Buy for an organization like oracle, very dilutive.

    Mr Hurd should look at bmc software, it's in the backyard of his former company. Bmc seems to have a good cloud infrastructure offering and is a lot cheaper. I don't know much around the mainframe business, but oracle could probably sell it and pay for the acquisition pretty quickly.

    The real beauty of any acquisition by oracle is the ability to integrate or let go stand alone. Anyway you look at it, if I were HP or IBM I would scared.

  • Report this Comment On October 18, 2010, at 6:25 AM, FW2981 wrote:

    EMC is a predator, it has gobbled up the likes of RSA Security, Documentum and recently Greenplum, in fact it has acquired around 50 companies. Does a Leopard change its spots? I think not. Who can afford EMC? IBM, MSFT, ORCL or maybe CSCO. Will they spend? Will EMC accept? I dont think so. From the mid 90's to 2000 EMC stock price soared hitting over $100. Today its at $21. Rumours are good for EMC share price, giving it at least some movement but EMC will need lots more rumours to get the share price moving. If you are one of these famous buy and hold people and bought EMC at $125 back 10 years ago, you are probably praying for EMC to be taken out.

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