As the M&A budget for 2011 appears to have been handed back with no significant purchases, and I thought there would be, it might be worth taking a wide angle look at EMC’s M&A model.
The bottom line is that EMC buys technology and people. It doesn’t buy revenue.
When I started with EMC the company was doing about $5B in business. By the close of this year the company should be doing $19B in business. What’s interesting about those two numbers is that there’s never been a significant boost in revenue coming in with an acquisition.
What do I mean by that? I mean all revenue gains have been as a result of organic scaling alone. If you examine EMC’s acquisition model, when not buying assets at fire sale prices from a failed start ups (Too numerous to list, looks like that scene in Raiders Of The Lost Ark where they’re crating up the Ark and putting it in the massive warehouse of curiosities and dangerous items) or key technology & people in a bidding war with competitors (RSA, Data Domain) the EMC acquisition formula at it’s most basic appears to be a valuation of between 10x to 12x revenues.
VMware was doing about $60M in business when EMC bought it for $635M, Isilon about $200M when it was acquired for $2.25B, Greenplum etc, etc so on and so forth. The common thread is there hasn’t been a single deal to date which brought any meaningful revenue boost in the door on acquisition day. Growth has come as a result of running acquired business well and organically scaling the reach of their technology using EMC’s sales force as a multiplier to create new revenue after the acquisition.
Yes like every other acquisition model you do get some bow wows every now and then, fortunately none of them are ever large enough to put a dent in the universe and you tend to pick up some good people who might find a more fulfilling career somewhere else inside the company. But where this model is in complete opposition to other large scale acquisition models, which tend to buy faltering companies with widely distributed technology but deliver a much larger day one revenue boost, is that you never start on the first day maintaining a massive legacy customer base who’s growth days are over.
So, when EMC looks at moving into a segment of an existing market, or into a market adjacency via acquisition, EMC tends to look at buying the leading technology with good people in a space with large growth opportunities.
Revenue expansion in the short term isn’t the primary concern. The growth opportunity over the longer term is as if you manage that well it’ll deliver meaningful additive revenue for many years to come.
