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EMC acquisition of Virtustream not a good move, say investors

Data storage company EMC Corp. announced at the end of May that it would be acquiring Virtustream Inc. for $1.2 billion. The acquisition is EMC’s answer to more data and applications being hosted in the cloud instead of on physical servers. According to The Wall Street Journal, EMC executives worry that a decrease in spending on storage equipment could result from more companies moving computing jobs to the cloud. Virtustream operates data centers that host cloud solutions, and will be another important tool for EMC to use in its growing portfolio of businesses.

The market value of EMC, which owns large amounts of such companies as VMWare and operates several businesses offering solutions in the storage and cloud computing industries, is about $52 billion currently. It has investors and analysts wondering: Is EMC too big? Earlier this year and in 2014, the company suffered a series of pressures to split up its storage business from its virtualization company, according to Network World. Activist investment firm Elliott Management bought 2 percent of the company’s stock in order to try and push the EMC federation to split. The answer was to purchase another company altogether and add to the range of services offered.

“EMC has a lot of irons in the fire – maybe too many.”

Stock woes
The company has yet to realize the goals set forth by the acquisition. Early in June, its stock price dove lower due to a lower rating and below average revenue growth compared with other companies in the industry, according to TheStreet. Lower net income and operating cash flow led analysts to call the company’s stock a hold at market close on June 15.

This is in line with predictions made by Daniel Ives, an analyst at FBR Capital Markets, at the time of the Virtustream purchase. EMC’s strategy of buying large shares in companies and expanding the kinds of services it offers is not working out as well as it would like, according to market indications.

“The Street will interpret this negatively, as we believe the path towards spinning off VMware is the right move in our opinion towards enhancing shareholder value,” Ives recently told The Wall Street Journal. “It’s an uphill climb for EMC from here on the growth front.”

EMC is looking to increase its offerings, but investors aren't so convinced it's the right path.EMC is looking to increase its offerings, but investors aren’t so convinced it’s the right path.

Cloud managed services market holding strong
EMC’s purchase of Virtustream is its response to organizations hosting more data and applications in the cloud, and the market for cloud managed services is still looking up for 2015 and beyond. According to a report published in May by MarketsandMarkets, the market will continue to grow at a compound annual growth rate of  about 15.5 percent from 2015 to 2020, increasing from $52.23 billion to $118.43 billion.

EMC’s latest acquisition notwithstanding, companies looking for cloud managed services may be better served by looking into providers with more experience with cloud infrastructure. EMC has a lot of irons in the fire – maybe too many – and a more focused company that has advanced knowledge of the benefits of cloud computing and how to implement cloud hosting solutions into business processes would be a better fit for enterprises.

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