Fool.com: EMC Reaches Into New Markets With Data General (News) August 9, 1999

EMC Reaches Into New Markets With Data General

August 9, 1999

Mid-market enterprise data storage products supplier Data General (NYSE: DGN) jumped today after agreeing to a buyout offer from high-end data storage heavyweight EMC Corp. (NYSE: EMC) valued at about $1.2 billion in stock and assumed debt.

The move will allow EMC to pass along the benefits of its "EMC Effect" to customers who can't quite afford the $1 million to $5 million price tag for its flagship Symmetrix storage products. Filling the gap in the $100,000 to $1 million range will be Clariion units from Data General, which has taken potshots at EMC and the other data storage biggies in recent months by referring to itself in ads as "THE Storage Alternative." Fearing the company may be marrying down, EMC's shares slipped today and its rating was taken down a notch to "buy" from "top pick" by Donaldson, Lufkin & Jenrette.

EMC relayed that customer demand was the rationale behind the deal, which is expected to expand its target product market to roughly $50 billion by 2001 from the $35 billion previously expected -- a 40% expansion. The addition of Data General is expected to add to earnings in fiscal 2000 and "significantly" add to the bottom line in 2001.

From Data General's point of view, EMC's aggressive salesforce will allow it to get the word out about Clariion faster and clearer than it ever could buy itself. Data General had been planning to hire some 450 salespeople over the next year or so for Clariion, which would have resulted in a $100 million strain on selling, general, and administrative (SG&A) expenses, explaining why the company's shares were off 20% for the year before today's news.

While EMC's high-end hardware products have enjoyed year-over-year sales growth in the 30% to 35% range for the past several quarters, achieving those same kinds of growth rates in the mid-range segment will prove to be a challenge. EMC believes Sun Microsystem's (Nasdaq: SUNW) recent reports of 25% growth in its mid-range products should be used as a proxy for the entire segment, even though Clariion's sales growth has been stuck at around 10% through the first three quarters of its current fiscal year. EMC's selling power will certainly provide a boost to this growth rate, but it is unclear how much.

Certainly, the mid-range offers opportunity, especially in the area of providing much-needed storage capacity to the growing number of smaller Internet services firms that need the around-the-clock reliability that EMC's high-end products can provide. The deal supports the thesis that EMC is the one to beat in data storage, the "franchise player" so to speak in this fast-growing market. However, adding Data General does little in the way of dispelling concerns about EMC's biggest near-term challenge -- how to maintain the stellar growth rates that have helped propel the company's shares 115% in the past year.

By Brian Graney (TMF Panic) (TMF Panic)

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