Stifel Positive on EMC's (EMC) Move to Acquire Virtustream; Company Now Positioned as Public Cloud Service Provider

Stifel affirms EMC Corp. (NYSE: EMC) with a Buy rating and $33 price target following news that the company would move to acquire Virtustream for about $1.2 billion.

Analyst Aaron C. Rakers offered the following conclusion: Although the size of the acquisition is likely to be a point of investor debate ($1.2 billion, or up to 10x revenue in a competitive bidding process), we are positive on the long-term strategic merits of this acquisition – although we believe it will be important to see application diversification overtime (i.e., +60 percent of IaaS via SAP apps) and how this is positioned relative to VMware’s vCloud Air. EMC emphasized Virtustream positioning is focus mission-critical enterprise application workloads – fulfilling EMC’s strategy as being holistic data / storage management provider for hybrid and public clouds. Virtustream’s xStream software resides as an abstraction layer on top of the virtualization hypervisor to provide dynamic application-specific resource management at the molecular level (ìVM) for CPU / compute, memory, network bandwidth, and storage IOPs.

Rakers noted, While the companies are not providing specific revenue / margin details, Virtustream’s CEO, Rodney Rogers, noted that the company’s average revenue growth has been in the ~60 percent/annum range, which is expected to accelerate following the acquisition. The company stated that it is currently running slightly ahead of this growth rate, though being hindered by the company’s own balance sheet limitations. As previously reported, in November 2014 Virtustream reported that it would surpass $100M/annum run rate exiting 2014. In terms of margins, EMC only notes that this acquisition is to be primarily viewed as a software-driven acquisition and thus the Cloud IaaS and Software-as-a-Service (SaaS) businesses represent nice margins when compared to EMC; suggested to be better than Rackspace’s mid-teens operating margin given their ability to more efficiently utilize data center resources.

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