By William Fellows
EMC Corp wanted Massachusetts neighbor Data General Corp’s highly-regarded end-to-end Clariion Fibre Storage unit so badly that it was prepared to buy the entire company for $1.1bn in stock. EMC will issue 0.3262 shares for each DG share, which based on EMC’s closing stock price Friday of $60 values DG at $19.58 a share or $1.1bn, a 48% premium over DG’s closing price of $13.19 on Friday. EMC says the acquisition will be accretive to earnings in 2000 and significantly accretive by 2001.
EMC, which had set itself a goal of doing $10bn revenue by 2001, says that the acquisition of DG, which it describes as an offensive not defensive measure, will raise this target accordingly. In the first nine months of its fiscal year which ends in September, DG earned $15.1m on sales of $1.07bn. It lost $152m on sales of $1.46bn in 1998. EMC earned $506.9m in the first six months of $2.41bn.
EMC employs 12,000 staff, Data General 5,000. There are expected to be some lay-offs. Ron Skates, CEO of minicomputer pioneer DG – just five miles down the road from EMC – now better known for its Clariion storage products, has long intimated the company would only be sold lock, stock and barrel, not broken up and offered piece by piece. Skates will stay on for the transition period but did not say what he would do after that.
The acquisition comes hard of the heels of the sale to IBM Corp of DG’s main computer systems and ccNUMA technology rival, Sequent Computer Systems Inc. IBM bought Sequent for its ccNUMA experience; EMC is buying DG for storage and will leave DG’s AviiON server business to operate as a separate EMC unit. EMC says it will leverage DG’s Intel architecture expertise across all of its product range. Accounting for the acquisition as a pooling of interests means that EMC cannot sell off DG’s server business for at least two years in any case.
Clariion high-speed disk-storage devices compete directly with EMC’s core product line – even though the companies don’t’ admit it – but enjoy more success a middle-market solutions, rather than as enterprise products. EMC says the midrange storage market was worth around $10bn in 1998. It will layer its software and services products on top of Clariion and says it will retain the Clariion brand. It will also retain the two companies’ separate fibre channel technology strategies: DG’s storage is end-to-end Fibre Channel, all the way to the disks. EMC runs traditional SCSI from the connector to disk internally.
Given the lack of OEM market opportunities left in the storage market, DG recently detailed plans to create a new 100-person sales force to target Sun, HP, IBM, Compaq and NT users. The new hires were a drain on DG’s most recent quarter. Ironically DG supplies Hewlett-Packard Co with OEMed non-Fibre Channel storage systems for its midddle-market requirements. With HP’s recent dumping of EMC in favor of Hitachi Data Systems we expect the HP’s deal with DG to wane at an accelerated rate.
Excluding the declining HP OEM business, Clariion revenue rose 50% in its second quarter. Including it, the business rose 12% year over year. The HP business was worth 16% of Clariion’s $103m revenue in the second quarter. Fibre Channel now accounts for 60% of Clariion revenue. Dell Computer Corp is now DG’s most significant OEM revenue stream, but it’s mainly low-end equipment. EMC could now pick up Dell for enterprise storage. DG claims sales of ccNUMA servers are driving the $135m Aviion business as they bring in additional networking, service and support revenue.
Healthcare is the largest Aviion vertical, accounting for 25% of sales in the quarter. Sales of NUMA systems are increasing although non-NUMA NT revenue continues to represent 60% of AViiON sales. MV minicomputer ships declined by 66% to $2m in the second quarter, and ships of 88000-based AViiONs declined to $2m.
It was only a few weeks ago that Data General was running ads in US dailies declaring how it agreed with EMC on storage, that the Fibre Channel and storage area network markets are growing, and that DG was there first. Yesterday it began running a series of ads saying Data General agrees with IBM… and its endorsement of ccNUMA technology via its acquisition of Sequent. The ad repeats IBM server group chief Bob Stephensons’s comments that IBM believes NUMA will be a defining technology for early 21st century Unix and NT servers. DG points out that it has been delivering its NUMA-based AViiON systems since 1995.
