Will IBM Acquire EMC?: Page 2 of 4

”IBM is one of the few big companies out there in a position to seek great companies at the right price,” says Harsh Kumar, analyst with Morgan Keegan & Company Inc. “It has plenty of cash and its stock has held up well." Still, he's skeptical: "Financially, this deal is possible, but still unlikely. With a bit of effort and money ploughed into its storage business, IBM could take EMC out in the marketplace.”

Another Wall Street analyst who covers storage but declined to be named asserts that integrating EMC’s service organization into IBM Global Services would be perceived as impossible by the market. “Both stocks would be decimated for it,” he says. “The cost of the acquisition would be astronomical and the market perception negative.” He concludes that EMC is far more likely to use its cash to fend off any unsolicited attacks. According to its recent financial statements, EMC has $3.5 billion in cash and $2 billion in cash equivalents.

Another major stumbling block to a hypothetical acquisition would be its effects on EMC employees. In any acquisition, companies run the risk that staffers might bolt when they perceive their personal investment in the firm to be diminished by a major change of direction. Even in today's tight market, it's clear that employees who may have joined EMC for its lead in the field could be alienated by finding themselves part of a larger, more diverse organization.

As a case in point, sources cite what happened to ConvergeNet when Dell Computer Corp. (Nasdaq: DELL) acquired it about two years ago. Out of 120 ConvergeNet employees, about two remained at Dell, according to insiders at the company.

Incidentally, there are also rumors about Dell and EMC. Both companies have denied it publicly, although some think it would make more sense than IBM-plus-EMC (see EMC, Dell Deny Alliance Rumors).