How EMC Counts on Mounting Demand for RSA’s Security Products

In the digital world, data storage and security command separate realms?companies that dominate e-storage typically have had little or no presence in the information-security industry, and vice-versa. That's about to change, however, if the nearly $2.1 billion acquisition of prominent data-protection firm RSA Security Inc. by electronic information-storage giant EMC Corp. goes through later this year as planned. “The strategic benefits of RSA, in terms of the brand … the intellectual property, the security-market credibility, were all huge drivers of why this was important to us,” said EMC vice president of information security Dennis Hoffman at a conference call for technology analysts shortly after the deal was announced June 29. Hopkinton, Mass.-based EMC is making no small plans for its new security division to be built around Bedford, Mass.-based RSA. RSA had revenues of $310 million in 2005, but EMC hopes to bring that to $1 billion “in a few years,” said Hoffman. The deal has its share of risks, however. While data storage and security seem like a natural pair, some observers question whether one company can produce best-of-class technology in both categories. “It seems fairly grandiose” was how one analyst summarized the purported synergies that Hoffman and John Worrall, RSA's senior vice president of marketing, crowed about in the conference call. Then there is the financial risk. EMC proposed paying $28 per share for RSA, a 45% premium over RSA's June 28 close of $19.36. The companies didn't announce the deal until late the next day, after rumors, and then confirmation, of merger talks pushed the stock up to a closing price of $22.88. And on June 30 it closed at $27.10. “The valuation took me by surprise,” says Don Phan, an analyst at Pleasanton, Calif.-based Javelin Strategy & Research. In addition, the $1 billion revenue goal for RSA strikes Phan as “pretty optimistic.” EMC, which had revenues of $9.7 billion last year, also projects bringing four other units up to the billion-dollar mark at about the same time. But, at a time when database breaches, phishing, and other forms of electronic fraud make the news almost daily, the e-security business is suffering from no lack of customers or potential customers. RSA has an A-list of corporate clients, including 88 of the world's 100 top banks. “For EMC, this is a growth area; their other areas aren't growing as fast,” says Phan. Founded as a data-storage provider, EMC has expanded into software and information management, partly as the result of 17 acquisitions worth about $4.7 billion in the past three years, according to a spokesperson. Software now accounts for 37% of EMC's revenues. RSA, meanwhile, has been on a buying binge too. Just in April, it bought PassMark Security Inc. for $44.7 million in cash and stock. That deal came on the heels of RSA's $145 million acquisition of Cyota Inc. in December 2005. Both PassMark and Cyota make software-based systems for e-commerce authentication. With PassMark, RSA gets access to device-ID software that is authenticating 20 million users, most of them through Bank of America Corp.'s online banking service. RSA hopes to bring that number up to 50 million within a year. The effects of the EMC-RSA merger on other firms in data security may be minimal, according to Javelin's Phan. “On the authentication-security space, with their purchase of Cyota and PassMark, RSA was already the 800-pound gorilla,” he says. “I don't see consolidation as much as partnership developing in this sector. Security is clearly going from a solo sport to a team sport.” RSA president and chief executive Arthur W. Coviello Jr. will become president of EMC's information-security division and an EMC executive vice president. RSA will retain its brand identity, Hoffman says. According to a news release, the merger agreement between the two companies calls for EMC to pay $28 per share in cash in exchange for each share of RSA and the assumption of outstanding options, for an aggregate purchase price of slightly less than $2.1 billion, net of RSA's existing cash balance. RSA had $208 million in cash as of March 31.