EMC ups the ante on Data Domain in Technology Bidding War

EMC Corporation (EMC), not exactly a household technology name, but one that business knows all too well as the company is involved in various lines of business supporting technology infrastructure and storage all around the world. The company has turned itself into a healthy income generator providing solutions for businesses in the areas of Information Storage, Information Management and Security.

Most notably for EMC of late has been its attempt to expand its reach over the IT crowd, including, but certainly not limiting to simply protecting its position against the blue-chip Tech giants of today. It spun off a piece of popular virtualization company VMWare (VMW) into an IPO two years ago and now for its latest move has set it sights on winning a bidding war for specialized storage company Data Domain (DDUP). On the other end of the table is NetApp (NTAP), a firm very much in the same corporate storage business that EMC wants to dominate.

With Data Domain initially accepting an offer from NetApp for $1.9Billion, EMC countered with something similar offering $30/share in late May, which now has been bumped to $33.50/share. An enterprise value of $2.1Billion, which is calculated by the $2.4Billion offer price, minus nearly $300Million of Data Domain cash. Traders think the last has yet to be seen in this back and forth, as shares of DDUP continue to climb being pushed to $34 in today's market.

Data Domain the takeover play? Certainly, with both companies having gone back and forth already, it'll be interesting to see how much value NetApp has put on the company. Will there be another bid, or as analysts seem to think, is this it and has EMC sealed the deal?

Lots of questions, but if the traders, and not the analysts, are to be believed this one isn't over. With major markets settling down after an astounding bump from the lows in March, this acquisition story is an opportunity in the tech sector, and one that investors should watch closely. I believe NetApp will think long and hard about it, and if there's another move from the other side, EMC will move in for $37 and cement its grip on the world of specialty corporate storage.

Winning the bid for Data Domain solidifies an already strong corporate technology business for EMC, and with virtualization wildly seen as the now and the future of cost savings in Information Technology, EMC is in the drivers seat of a major stock ramp up at the first concrete signs of economic normalcy. In the $12-$13 range its still the underrated, and the unsung hero of technology names to own.

Disclosure: Author holds no position in any company mentioned.

Markets End Week on a high, boosted by further Strong Earnings

Microsoft (MSFT) led the markets higher as its quarterly earnings surpassed estimates. The Dow finished up 1% and the Nasdaq almost 2%. Hope in the Financials was somewhat restored today also as Countrywide Financial (CFC) painted a hopeful picture for Mortgage recovery.

CFC, seemingly America's poster child for the credit crisis situation, rose over 30% as the company provided an outlook that signalled recovery. Investors met this with broad buying in many large and tailored financial names. The big banks, including Bank Of America (BAC) and Citigroup (C), after being pressured all week, recovered a few percentage points.

On the heels of the red hot IPO of VMWare (VMW), parent company EMC (EMC) reported a stellar quarter and outlook Thursday. Shares lifted EMC to new highs and Friday sent the stock to a record of close to $25/share. The company was hovering around $18-$19 when a small stake of VMWare went public recently, and subsequently more than doubled.

Investors will wait for the Fed Rate Decision to come in the week ahead but the hope instilled by CFC has to provide some foundation for recovery in the battered sub-prime sector. The start of a recovery for the big banks and trading houses should filter through as well. All eyes will be on the Fed in the trading days to come.

WC Investing Q&A: Session I

Well its time to introduce something new to the WC Investment Blog. The best way to offer feedback I think is through Q&A Sessions. So here we are with the first one, of hopefully many more.

I've been fortunate enough to have generated a level of interest in my Investment Writings and because of this I've been asked a variety of questions on an amalgam of stock topics. So I thought instead of burying some of my responses in commentary and outside sources I would bring them to the forefront here, officially. Just so there's no confusion, this isn't a lightning round by any stretch, (I'm pretty sure Jim Cramer's got that trademarked) but I will try to keep responses relatively brief.

So let's get started.

1) Talked before about Diageo (DEO) as an Alcohol play, is there anything riskier and more obscure out there?

One company is Central European Distribution (CEDC) and what they do is distribution of, you guessed it, alcohol into and throughout Central Europe. They also produce and sell vodka throughout Poland and distribute an overwhelming number of other brands through the region. One year chart looks beautiful here and I first mentioned this play when shares ran from $18 to $39. I thought then part of the boat had sailed but the company is still worth a look. Forward P/E of 19-low-20s and a Price to Earnings Growth ratio estimate at about 1.40-1.5. If speculative plays in the alcohol space is the name of the game this is one of the only games in town.

2) Akamai and its upcoming Competition?

Akamai's (AKAM) a solid tech company. I like it and own Call options in it. It got really crushed when it reported its previous quarter numbers and now its earnings season again for this company. While it's had a pullback, I think AKAM remains stronger positions than its competitors in the Internet back-end bandwidth game. Major League Baseball is seeing a resurgence of traffic now as the playoff races finished up and the post season has begun and AKAM's sure to benefit. Limelight Networks (LLNW) seemed to be up and coming but it faltered heavily over the late summer months. There are concerns over margin contraction due to competition , but I still think AKAM it is the best company in this space.

3) VMWare IPO and beyond?

I talked about my thoughts on VMWare (VMW) and its IPO here (Link). I was weary of overpaying if VMWare jumped to $60 on its first day. I thought EMC (EMC) was the better play since they still hold 89% of VMWare all to themselves. VMWare has got it going though and as it breaks $90 and heads for $100 its even scarier. But the business that its in will be a big one in corporate circles and it is the only game in town right now when it comes to virtualization. On any pullbacks I would like to own it, but till then EMC still gives you great VMWare exposure with less risk.

4) How does Ebay go about increasing listings? And How is Ebay affected by Macroeconomics

Ebay's (EBAY) most important business is the core auctions business. They are seemingly the only one and as such have major control over pricing. Ebay was losing its core business to its own stores/Amazon's personal stores and other such merchants online. This was due to Ebay increasing prices too much. This drove down listings. When Ebay earlier this year reshuffled their pricing schemes it seems to regulate the business back and hence led to an increase in listings. So that's one way, a second is advertising. Ebay does a lot of it, but to further increase listings they need to do more. Ebay ran a pretty successful I think "It" campaign through TV and print ads but I havn't seen anything like that in quite a while from the company. Third, Ebay needs to further expand into more worldwide markets. They've made some strides in Europe but there's still a lot of room for growth there. The East markets are tougher for American companies to crack since they have traditionally had a hard time understanding the consumer and cooperating with regulations.

As for Ebay's macroeconomic issues, it like all technology stocks is susceptible to factors like inflation, interest rates, employment, consumer confidence etc. Interest rates, while not seemingly a factor in terms of core business for Ebay do have a big effect on general market trends. When the Fed cut rates earlier the market rallied in relief that the sub prime crisis could be further averted. Had rates not been cut Ebay would've tanked hard with the rest of the market. The employment issue is also a broad market issue, but Ebay feels the effects. Sellers of merchandise on Ebay will have a hard time getting rid of their things if the people who were just buying have suddenly lost jobs. The same goes for consumer confidence. People will only feel free to use their loose cash if they feel their economic situation warrants it. Hence they need to feel confident that they have enough to get by regardless of some casual spending.

The biggest issue for Ebay and other highly valued technology companies is that macroeconomic factors have a direct correlation to P/E ratios. When the economy is strong and macro-economic data points to growth and continued strength the leaders in the markets enjoy P/E premiums, so a company like Ebay can be valued fairly at 40-50 times trailing earnings. When these macro-economic indicators start to shift negatively and fears of a recession in the economy loom its very easy for those P/E premiums to contract sharply, and even though Ebay's growth could be consistent the company would trade at 25-30 times earnings rather than 40-50 times.

5) Altria and the Philip Morris International spin-off, what to do now?

I've liked Altria (MO) in the past and its done well. I liked it going into the run up to the Kraft split and now also before the PMI announcement was finalized.
I think PMI is much better to own as a pure smoking play that actually has some growth.
Smoking in North America is all but dead in the growth department. That's the main reason why I'd be hesitant with Altria. I do think owning it is a good idea for the PMI spin. I think people will jump into that when it becomes fully PMI. Only way to do that initially will be to own MO. I can see MO coming into the $75-77 range at the end of the year from its current $69 range.

6) Fund Holding Performance through the last quarter?

I'm working on something that should be up very soon.
I intend to publish the fund's largest holding, gainers, losers and trades that were closed during the September quarter.

Is the Hype behind the VMware IPO Worth the Investment?

VMware (VMW) is a software service unit that creates various virtualization solutions for a multitude of consumers. EMC Corporation (EMC) is behind VMware and is spinning about 10% of the company in the IPO that is due to open trading August 14th. EMC acquired VMware in 2004 for around $600Million and if the hype machine behind the IPO translates into interested investors, the company will surely reap the benefits. The biggest sell of virtualization software is the ability to run multiple operating systems on the same physical machine at the same time. With the amount of money that is spent on server infrastructure within American corporations this, some argue, is the future of computing. Less physical boxes running simultaneous split operating systems will save incredible amounts of money, use less resources and provide increased flexibility as the world of multi-core computing becomes reality.

VMware also creates smaller scale solutions for consumers, such as its popular desktop virtualization tools that allow Apple (AAPL) Mac users the ability to simultaneously run Windows on their Intel-based iMacs or MacBooks. Apple's own solution called Boot Camp provides a similar functionality however the user is forced to reboot the machine in order to switch between Windows and Mac OS X.

This growing business isn't anything close to small peanuts as VMware did $700Million in Revenue last year and had $87Million in profit. Last quarter the growth continued as VMware reported $300 Million in revenue, representing an 89% increase year-over-year. EMC plans to issue 33 Million shares of the around 375 Million in VMware. That's right EMC is keeping almost 90% of the company out of public hands. VMware has certainly been popular among the huge market tech names as both Cisco (CSCO) and Intel (INTC) have stepped up and purchased small pieces of the firm.

Can VMware make the average investor money on IPO day? It's possible but I would be extremely cautious of over-paying for a tiny piece of this solid, growth company. Investors started to realize that EMC would actually be the safer way to get in on the VMware craze and shares of EMC jumped 8% today to $19/share, giving the company a market cap of $40Billion and a P/E ratio of 31. A company that showed growth of 20% last quarter and posts an estimated growth rate of 19% from this year to next is certainly attractive at P/E levels in the low 30s.

The hype behind VMware is icing on the cake for EMC investors, and this should be the safer, smarter play for those who won't get in on the ground floor when VMware's IPO price is announced. Ranges for the IPO have increased from the mid 20s to the high 20s with some analysts expecting over $30/share. There's also been talk that the company could open as high as $60/share. At $60 that would give VMware an implied market cap of $22Billion. Half the market cap of its owner EMC. That would be extremely high for a company that looks at estimates of $1-2Billion in revenue this year. In contrast, EMC had over $11Billion in revenues last year and sports of growth rate of almost 20%.

Virtually the entire market expects a red hot VMware IPO, no pun intended. Plenty of money will change hands and opportunities will be there, however, a word of caution for investors because if reasonable prices can't be found in the early going I would not recommend the chase. With EMC still owning 90% of VMware anyway, that should be the way to play this one.

Disclosure: Author is long AAPL, INTC and holds no positions in the other stocks mentioned