A few weeks ago, I spoke with EMC's chief technology officer, Jeff Nick, about the company's broader innovation strategy -- which can be a tough thing for an outsider to grasp, especially when you're talking about a 45,000-person company. But one big piece of EMC's approach is to acquire other companies in strategic market positions. So I wanted to drill down into the firm's specific approach when it comes to these mergers and acquisitions.
One potentially huge deal has been widely rumored for the past month: the prospect of EMC acquiring Seattle-based Isilon Systems
EMC wouldn't make any specific comments about Isilon, but the firm did speak with me about its M&A strategy more broadly -- and about its acquisition of Santa Clara, CA-based Data Domain last year, which also went for $2 billion. "EMC has a long acquisition history and track record," says Matt Olton, vice president of corporate development at EMC. "We've learned our lessons about what works and what creates more challenges."
A caveat: EMC is "often viewed as a very acquisitive company," Olton says, "but you'll see investments in R&D equivalent to our acquisition spend." Not many tech companies can focus on both internally and externally driven innovation on a large scale, says Olton, an 11-year veteran of the firm who works with a core team of about a dozen members, plus a much larger virtual team that cuts across all business functions.
To help frame EMC's approach, Olton says any successful M&A practice boils down to five points:
- A core strategy that works. It doesn't have to be the best strategy in the world, so long as it can be executed, he says. (I took this to mean everyone needs to be on the same page, even if it's not the perfect page.)
- Evaluation discipline. This means having the patience to pursue fewer transactions, but examining them more thoroughly -- basically, being very selective about potential deals.
- Execution discipline. It's important to tackle the business objectives of any merger with "a real sense of focus," he says. This has to do with the integration of the merged company, and making sure to follow through on why the acquisition was made in the first place.
- Talent retention. Holding on to key leaders, who usually exit a merged company as soon as they can, is an art. Olton gave as examples of those who stayed at EMC, at least for a significant amount of time: Frank Slootman from Data Domain, Art Coviello from RSA, and Diane Greene from VMware.
- A strong sense of accountability. This seems obvious, but there needs to be a clear set of metrics to evaluate the performance of any merger. (An obvious one is the revenue growth of the acquired business units.)
None of this sounded particularly unusual to me, so I asked Olton how EMC's acquisition (and company integration) approach really differs from that of IBM or other big tech companies. Not surprisingly, Olton described EMC's approach as "more successful" than the others. Its key differentiator, he says, is its "ability to adopt a very flexible model of integration that fits the context for any particular transaction." That means knowing when to leave a company as independent as possible, and when to integrate it fully.
A recent example would be Data Domain, acquired by EMC for $2.1 billion in cash in July 2009. Because of the circumstances around the deal -- EMC took the deal away from its competitor NetApp -- the "first meeting with the company came after we executed an acquisition agreement," Olton says. "We didn't know what to expect, but it became very clear they were a company based on the same cultural attributes that had made EMC successful." In other words, there was a good cultural fit of accountability, and Data Domain had what EMC considered to be great operational discipline, a strong track record, and investments consistent with forecasts, Olton says. That, and a great sales force -- which EMC did not want to disrupt.
"The objective is not to lose business momentum, and to accelerate everything that's good about the business," he says. "And figure out how to put Data Domain's products into our very strong distribution network." So far, so good -- Data Domain's growth has accelerated since the acquisition, Olton says. (One analyst estimated that the company's revenue from Data Domain alone was $175 million in the second quarter of 2010.)
Indeed, according to a recent report by the M&A group Corum, the Data Domain acquisition is a "runaway success" that will lead to "a multi-billion dollar return to EMC investors over the next five years." The report also predicts that EMC's Backup and Recovery Systems division -- newly formed from Data Domain and another acquisition, Avamar -- could produce as much as 15 percent of the company's total revenue in two to three years.
The Corum report attributes the deal's success to three factors. One, EMC "bucked the trend" by making a very aggressive bid in the heart of the recession, thereby winning the deal from its competitor. Two, Data Domain's market-leading deduplication technology (an advanced form of data compression) "has the potential to reshape the storage landscape" and also encourages more sales of EMC's storage products. And three, EMC focused on integrating Data Domain very carefully -- spending lots of time and money to align the businesses and retain key leaders.
As for the future, Olton says all innovation at EMC is tied to the firm's main strategic direction -- which is "a journey to the private cloud." He's talking about EMC's corporate cloud computing strategy, which involves (I'm oversimplifying here) enabling companies to build their own cloud infrastructure, rather than using Internet-delivered services like Amazon's or Google's.
Olton and EMC wouldn't talk about any impending acquisitions or potential targets, of course. In the end, on the topic of Isilon Systems, Olton had no comment other than, "They seem to be doing well."
More from Xconomy.com:
- Startup School: Round Two: The 2010 Xconomy Guide to Venture Incubators
- Why Facebook Places Will Make Foursquare Into a Footnote
- Kendall Square Wants an Entrepreneurial Walk of Fame and So Should Every Innovation Hub
Gregory T. Huang is Xconomy's National IT Editor and the Editor of Xconomy Boston. You can email him at email@example.com, call him at 617-252-7323, or follow him at twitter.com/gthuang.
Google is a Motley Fool Inside Value pick. Google and Vmware are Motley Fool Rule Breakers recommendations. Amazon.com is a Motley Fool Stock Advisor pick. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.