EMC to Acquire Isilon Systems - Analyst Blog

A leading provider of data storage systems, EMC Corp. (EMC) announced the commencement of a cash tender offer to acquire storage systems vendor Isilon Systems Inc. (ISLN). The acquisition will facilitate EMC Corp. to tap the surging demand for data storage technology.

The purchase price is approximately $2.25 billion or $33.85 per share in cash without interest and withholding taxes. The deal represents a 29% premium for Isilon shareholders. It is the largest deal in the storage space after the acquisition of 3Par by Hewlett Packard Company (HPQ).

On November 14, EMC's wholly owned subsidiary Electron Merger Corporation had announced a merger agreement with Isilon. The deal has been unanimously approved by EMC's board of directors.

EMC's aggressive acquisition strategy has driven its market leading position and strengthened the Information Storage and Content Management and Archiving segments. The company is a bellwether with approximately 20% market share, followed by International Business Machines Corp. (IBM), NetApp Inc. (NTAP) and Hewlett Packard.

Isilon, a leader in the clustered storage market will be a perfect fit for EMC. Clustered storage plays a pivotal role in storing huge amount of high-definition media applications data. The acquisition will enable EMC, a premium vendor of clustered storage, to gain a stronger foothold in the computer storage devices.

Isilon provides scale-out storage systems, driven by its OneFS Operating System. Isilon'shigh bandwidth technology, particularly in the media and entertainment, provides tough competition for NetApp.

Isilon's revenues for third quarter 2010 were approximately $53.8 million, indicating a leap of 77.0% year over year. EMC expects the acquisition to be accretive to its bottom line profit by 2011. Management also expects combined revenues to reach $1 billion by the second half of 2012. Analysts estimate Isilon to generate about $200 million in revenues in 2010, representing a growth of 60%.

With a market capitalization of $1.8 billion, Isilon's acquisition will improve EMC's revenue opportunities, but add integration and valuation risks. Since both the companies share the same space in the clustered market, the deal could attract anticompetitive scrutiny, thereby delaying the entire acquisition process.

Nevertheless, upon completion, the deal could be among the largest acquisitions till date in the storage space. The integration of Isilon's technology with EMC's scale, reputation and infrastructure will drive growth.

Our Take on EMC

EMC reported strong third quarter 2010 results, with earnings increasing 47.1% year over year to 25 cents per share versus 17 cents in third quarter 2009. Earnings per share (including stock-based compensation but excluding restructuring charges) beat the Zacks Consensus Estimate of 24 cents by a penny.

The year-over-year growth was primarily driven by strong revenue growth in the quarter, which escalated 19.7% to $4.21 billion. This was well above the Zacks Consensus Estimate of $4.14 billion.

We believe that EMC is well positioned to grow over the long term, based on its strong storage product portfolio and increasing market share in the security and intelligence segment. EMC's increased 2010 outlook, based on a healthy IT spending environment, encourages us to expect strong market growth for the remainder of fiscal 2010.

Moreover, with increasing transition to cloud computing technology, we expect growth for storage service providers and storage infrastructure suppliers, such as EMC, over the long term.

However, competition from large vendors remains a concern.

We maintain a Neutral rating over the long term (6-12 months). EMC has a Zacks #3 Rank, which implies a short-term Neutral rating (for the next 3 months).

 
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