Dell’s $67 billion bet on EMC – Will it work?

Preface

Dell, a pre-eminent supplier of IT equipment to enterprises & retail consumers, has in the past 3 years tried to shore up its sliding revenue by betting big on IT services & security. Michael Dell, took the company private in 2013 to shape the company’s future in a faster, more nimble way & expand into new areas. Part of this has been the quick decision to acquire EMC.

EMC, on the other hand has seen spectacular success over the past decade as a leading provider of data storage, virtualization capabilities to enterprise customers & made a strong foray into cloud computing, mobility supported by VMWare (its subsidiary)

There are obvious benefits in this deal – Dell with its product portfolio / large customer base in Servers & hardware mingling with EMCs strength in storage & virtual machine clientele. The merger creates an entity with complementary business with an unmatched scale & global reach. Definitely synergies are present.

The combination of Dell & EMC would create the world’s largest privately controlled tech company & the largest seller of tech equipment.

The merger itself will take a year to fully come to force & has a clause where EMC could still consider a better bid. Until then, both are expected to continue with their existing corporate structures. If the merger does happen, as I think it will, it gives enough time to set priorities, comprehensive strategy, investments into innovation & design of their product portfolio.

How does compare with large tech mergers in the past?

Perceptions of this deal

A poll conducted by 451 Research with IT CIOs & VPs within 24 hrs of this news drew weird mix of responses – 31% were positive; 20% were negative. Interestingly, Dell customers were particularly positive about the deal stating they will have “access to a much larger portfolio of technologies across storage, information security, IT services, servers and PCs from a single vendor”. But 40% of EMC-only customers think this will be a setback diluting focus on innovation in storage & cloud as well as citing financials burden dumped on the combined entity (discussed below).

On the day the merger was announced, an otherwise detestably long drive between two of our Accenture offices in Bangalore turned pleasurable due to the company of an erudite leader in our firm. Alongside his balanced assessment, he pointed me to a write up that called for IBM, HP, EMC, Dell and Cisco to all merge together!

I also found the rather candid statement from HP interesting – “This is a real opportunity for HP. Two of our largest competitors are attempting a highly distracting, multi-year merger, just as we are launching two new, focused companies. The massive debt burden Dell and EMC are taking on undoubtedly means that they will have to radically reduce research and development, and integration inevitably will create disruption as they rationalize product portfolios, channel programs, and leadership. While Dell and EMC are sorting out their future, Hewlett Packard Enterprise and HP Inc. will be working to take share and advance our technology leadership in key areas like converged infrastructure, private cloud, all-flash storage, personal systems and printing.”

 

What happens to VMware

EMC bought virtualization software giant, VMware in 2007 & later put 15% of its shares on the NYSE for public trading. Indications are that VMware will continue to be publically traded while parent co. EMC will go private.

Michael Dell has been staunch in proclaiming the future independence of VMWare, stating ‘VMware is a crown jewel of the EMC federation. Our intent is only to continue to help it thrive, innovate and grow.’ 

An interesting article that was sent to me by a friend provides addl. insights.

 

A sort of David buying Goliath trade?

The fact that Dell’s overall worth is roughly a third of the offer made for the EMC buy piqued my interest in how this mega deal would be financed. Reading of the financial press tells me that Dell has commitment from eight banks to finance as much as $49 billion of this deal. The rest is expected to come from venture caps (Michael Dell’s MSD, Silverlake et al.) among others.

Needless to say, you would have noted that this is a highly leveraged transaction & thereby a risky one that will evoke scrutiny from regulatory bodies in the US.

Since the financial crisis of ’09, high corporate debt is frowned upon and per Fortune mag, this year has seen the highest number of downgrades of corporate bonds since the gloomy days of the melt down.

The future financial health of the combined entity is definitely a question mark.

 

Michael Dell – Future is blue or grey?

Gazing at the Crystal Ball

Storage is ofcourse EMCs fortress but the past 4-5 years have seen a tectonic shift in how companies visualize their storage investments & needs (definitely small-medium business but a growing number of large ones too).

The likes of Amazon, Google & Facebook have built ‘fit for purpose’ infrastructure from the ground up that is extremely high availability, cost effective, scalable & agile to meet business demands. Enterprise customers have taken note & want to replicate this model.

From humble beginnings 9 years ago, Amazon has been highly successful in commoditizing their internal architecture for a global clientele. In a report published 4-5 months ago, Gartner said their client cloud footprint is more than 10 times that of the other top 14 cloud providers combined!

Google – experts say it possess the best minds, infra & maybe even the best cloud software around. But it has been several steps behind in putting forth a complete vision & proper packaging, marketing. I suppose their focus on mobility & the older breadwinner of online advertising has restricted a more strident ‘go to market’ push on the cloud front. But still, Google’s cloud offerings registered the highest market share growth in 2014 of all major providers.

And lastly, having personally worked on Microsoft’s offering in Azure, I can say that it’s the best for any MS based stack.

But a relevant fact here is that I don’t see EMC featuring prominently in conversations around elite cloud providers. Though EMC sells cloud based products, it is far behind the class of Google’s infrastructure or Amazon’s profitability, scale.

Its definitely true that enterprises are buying & will continue to buy the kind of storage systems that EMC specializes in. This will be driven by regulatory & legal constraints (mandating local data hosting), presence of legacy apps in the enterprise stack & persistent need for custom solutions, the sort that cloud based providers cannot support. But customers needing such storage & infra are seeking lower cost options. This is where EMC is facing stiff competition from newer upstarts all over the world.

Looking at a buyer perspective, not so long ago, IT execs’ strategy was around preemptively buying storage based on rough assumptions on app roadmaps & not always on firm projections trickling down from anticipated business strategy / growth (as in the case of a healthcare client I worked few years ago).  This was also heralded by long term deals with storage providers. But today, the mindset is changing across board that business need should be the driver & storage, devices are enablers. This is where the new ‘cloud-first’ thinking is shaping purchasing patterns.

Dell’s faltering fortunes in the enterprise & consumer device space is a well-documented one.  And its foray into the congested IT services space can hardly been termed a success story. So EMC’s would be owner is facing its own struggle for relevance.

Furthermore, we’ve seen a recent trend of large companies decoupling their distinct businesses to improve focus & innovation. eBay’s move with Paypal is a case in point. In general, we’re seeing a general movement toward leaner, more agile org setup. The Dell acquisition bucks this trend & is going to build a behemoth, albeit with the advantage of being private.

So, in summary, only time will tell if this will become an all-conquering modern T-Rex of a firm or a dinosaur already on a slow slide to extinction!

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Further reading

https://www.dell.com/learn/us/en/uscorp1/secure/2015-10-12-dell-emc-transaction