Introduction

The waves of change in the it world are causing Dell to acquire EMC into a single $80 Billion+ company by mid-2016. Michael Dell, CEO of Dell, and Joe Tucci, CEO of ECM cited an opportunity to grow revenue and profits more quickly as a privately held company than as a publicly traded company. The deal is estimated to be worth $67 billion. The final combination of the companies is not expected to be complete until Spring 2016

As part of the same acquisition deal, announced on Oct. 12, 2015, VMware, a $6 billion company that is now 80% owned by EMC, will remain as a standalone, publicly traded company – and we believe will likely become independent.

As to structure, the new company will have three “hubs” – one in Austin, TX; one in Hopkinton, MA; and one in California’s Silicon Valley, where Dell and EMC and VMware maintain R&D centers. Even if any of these business operations are trimmed, the reach of Dell/EMC will continue to be global and diverse. – maintaining a Massachusetts hub, while bringing itself closer to ecosystem partners in California and Texas.

The leaders of both vendors indicated there will be “de-leveraging” to reduce the new company’s debt. We believe possible avenues for “de-leveraging” include layoffs, reducing headcount, spinning out business units, selling off the PC and consumer businesses (as in the Lenovo case). Since 2013, Dell reduced its debt in going private by $4.5 billion over the two years it has been a private company.

Technical Aims of the Deal

The combined company will address the opportunities in digital transformation, the software-defined data center, hybrid cloud, converged infrastructure, mobility and security. For now, most of there has been no indication of the future of EMC’s Federation.

Impact on Customers

Customers will be looking for these benefits and for easily deployed solutions for hybrid clouds – but it’s still not clear when the new Dell/EMC combined solutions will be ready. (EMC currently offers these solutions today.)  The uncertainty until the deal closes – and the thought that there will be “de-leveraging” to reduce the company’s debt –could result in concerns about future layoffs and business-unit spinoffs.

If the new company creates more complexity for customers, then it could potentially become harder to see immediate benefit – and responsiveness could suffer, taking with it any goodwill and perceived premium value of the acquisition.

However, the stated objectives of Dell and EMC are to expedite business processes, especially under the umbrella of private ownership. On the flip side of the coin, R&D spending should increase, as signaled by the companies’ statements about increased “innovation” – and customers should see more resources devoted to support services from Dell, EMC and VMware. Certainly, since going private in 2013, Dell has increased its enterprise services to customers, and proactive product and solution development to stay ahead of customer needs.

Impact on Channel Partners

Channel partners in the ecosystems of Dell, EMC and VMware will seek clarity on the business models of the merged company. They will need to know more about the “co-opetition” that will inevitably emerge as so many entities become part of the same business organization. Go-to-market strategies will likely have to be adjusted for many of these partners – and expanded or contracted, according to the new engagement models.

There could also be some concern about the sheer size of the combined company, as well. Would it be too unwieldy to manage easily? Only time will tell if that would be the case.

The immediate risk is partner defection. The markets in which Dell and EMC play are filled with startup competitors all nipping at the heels of both vendors. That along with the uncertain future may see some partners “jump ship” to competitors in order to gain leverage with differentiated product and solution offerings.

Why Now?

The timing of the acquisition is interesting. It was announced just 3.5 weeks before HP, currently the world’s largest IT company at around $100 billion in annual revenue, is scheduled to split into HP Enterprise (HPE) and HP for PCs and printers (each expected to have around $50 billion in annual revenue).

The new combined company will change another IT tech giant, IBM. While IBM currently generate more than $80 billion in annual revenue, it does so mostly from a combination of software and services. Conversely, the new Dell/EMC, also expected to generate $80 billion in annual revenue will achieve most of this (at least at the time when the acquisition is complete) with a combination of hardware and software.

Behind the scenes, and away from reporting cycles, many changes could be made to the combined company’s business processes and product offerings before these changes would be announced or reintroduced to the customer base.

Today, the Federation companies include: EMC, VMware, Pivotal (which focuses on Big Data/Analytics and Cloud Computing), VCE (which focuses on converged infrastructure), RSA (which focuses on security) and Virtustream (which focuses on cloud computing). When the deal completes, will this Federation remain intact? Additionally, how will Dell play in this Federation?

How Investment Money Drove the Deal

That both companies are under the scrutiny of activist investors. Dell was taken private by Silver Lake Partners in fall, 2013; Silver Lake will play a big role in the proposed merger, providing much-needed capital to take the large EMC company private. Part of the debt pay-off in coming years would likely come from selling off selected technologies, or reducing overlaps between the business units.

Inside EMC, Elliott Management owns 2 percent of EMC – and has been interested for some time in unlocking more value from that investment, often focusing on VMware’s potential to generate more revenue in the enterprise with virtualization, hybrid clouds and software-defined data centers (SDDC).

On the announcement conference call for industry analysts, Dell and EMC leaders talked about three times revenue synergies versus cost savings.

Neuralytix believes it is not yet clear that the immediate benefit will be that dramatic. Rather, it’s likely that some degree of “settling in” will need to take place – as it does with all mega-mergers—before the revenue growth would be evident.

Software and Services

We note that the acquisition  announcement did not dwell on software and services – or on networking revenue  – but it should have. The vast majority of the $1 trillion worldwide IT revenue is associated with software or services – or both. While Dell has improved its services offerings – and worked closely with large enterprises to deliver them, many of the specifics about service delivery will change over the next 2-5 years, as the Dell and EMC combine.

Why dwell on software and services? Taken together, they account for a much bigger share-of-wallet (and margin) than servers or storage. The worldwide server market is in the range of $50 to $60 billion, just under twice the size of the worldwide storage market. Clearly, there is much more headroom in the storage and services business, but the amount those two offerings could contribute was not discussed in detail in the intend-to-merge announcement.

Changes for the Channel Partner Ecosystem

Both EMC and Dell use the indirect channel, but less so than their biggest IT competitors, HP and IBM. Both EMC and Dell use multiple types of partners to deliver solutions to the customer, including GSI (Global System Integrators), distributors and VARS.

For the core businesses in the US, Dell uses Ingram Micro, Synnex and Tech Data , while EMC uses Arrow and Avnet. The choice of distribution partners reflects the difference in product sets and market segment, with Dell focusing on higher volume and SMB customers, while EMC is primarily focused on high-touch enterprise customers.

Neuralytix believes that, with this acquisition, the channel and distribution questions need to be addressed – and soon. Both companies report growth through the channel. Given that the new company would provide system integration, channel partners will likely be considering how this will impact collaboration with, or competition with, the new company. Executives from both companies referred to co-opetition model, with some degree of competing and cooperation in the marketplace.

For some partners, this acquisition is great news because it will reduce the number of supplier relationships needed for a complete end-to-end solution. However, unless and until the new company announces its go-to-market strategy, channel partners will be wondering how their relationships with Dell and EMC will work going forward.

Neuralytix believes these new relationships should be clarified soon, or systems competitors could start making inroads with current partners.

A Changing Technology Landscape

A changing technology landscape is also playing a role in this acquisition. EMC’s traditional storage business (that accounts for roughly 80% of EMC Corporation’s revenues) has moved quickly to an x86-server based platform. Many of its newer products were built on scale-out x86-based storage technology. And yet, many new “hyperconverged” companies, including Nexenta, Nutanix, SimpliVity and others – are biting on the heels of EMC with rapidly deployable hyperconverged compute, storage and software solutions, competing with EMC’s x86 solutions.

It is clear that EMC needs a more competitive server platform to integrate with its virtualized storage solutions. Since Dell had been a long-time partner, integrating Dell-manufactured x86 servers with EMC storage will be synergistic – it will help to reduce costs, and it will provide EMC with an alternative source of servers for cross-platform business solutions.

EMC had previously relied on Cisco’s UCS servers, and also on generic, white-box servers from Intel; now, it will be able to integrate technologies more quickly and easily. This makes an EMC relationship with Dell opportunistic.

Up to now, Dell has had a reasonable share of the total storage market, but it did not have the breadth of enterprise-level storage solutions necessary to compete toe-to-toe against HP or IBM. With EMC’s strong storage portfolio, Pivotal in the fast-growing Big Data and analytics market, RSA for security and EMC’s strong global services capabilities, the proposed merger will bring the combined company an even stronger competitive position in enterprise computing.

A Changing of the Guard for a New Technology Wave

The technical change also represents a changing of the guard – from the mission-critical, scale up data center of the 1980s and 1990s, to the scale-out hybrid cloud world that is taking on traditional workloads – and much, much more (e.g. the Internet of Things [IoT], Cloud Computing, Big Data/Analytics, Mobility and Social Media).

These complex workloads demand new solutions that span the enterprise – and link to cloud services – altogether known as hybrid cloud workloads.

The CEOs of both vendors discussed the synergies associated with combining Dell’s high-volume server/storage business with EMC’s mission-critical storage business. This speaks to the large – and valuable – installed base of high-end EMC that are the foundations of mission-critical workloads at many large enterprises worldwide.

EMC chairman and CEO, Joe Tucci, acknowledged the disruption that new technologies are bringing to the IT marketplace. EMC has already started to integrate virtualization and cloud technologies into its own product line – and has seen the power of hybrid cloud.

“The waves of change we now see in our industry are unprecedented and, to navigate this change, we must create a new company for a new era,” Tucci said in his announcement remarks. “I truly believe that the combination of EMC and Dell will prove to be a winning combination for our customers, employees, partners and shareholders.”

His statement reflects the pressures that were converging on EMC before the deal was negotiated and announced:

  • Its traditional base of enterprise storage was under attack from new, more nimble rivals;
  • It needed an infusion of cash to fully integrate the capabilities brought to it by the Federation it had nurtured in recent years;
  • It knew it had to make the leap to hybrid cloud more quickly.

Surely, the world is moving to cloud-enabled IT for end-to-end applications solutions. Surely, the world is moving to software-defined infrastructure. That will affect all vendors and suppliers in the IT marketplace.

It will make cloud service providers a much bigger part of the worldwide IT customer mix, as more applications migrate from enterprise data centers to cloud data centers. The question here is how well the pieces of the new EMC/Dell organization will fit together – and how quickly the combined entity can grow. Those are perennial questions for extremely large mergers – and we won’t be able gauge the new company’s growth until 2017, and beyond.

Surely, the world is moving to cloud-enabled IT for end-to-end applications solutions. Surely, the world is moving to software-defined infrastructure. Going forward, cloud service providers will be a much bigger part of the worldwide IT customer mix – something Dell is well-prepared to address  – as more applications migrate from enterprise data centers to cloud data centers, and the rest are linked to cloud infrastructure via hybrid clouds.

Now that the acquisition is announced, the ecosystems built around Dell and EMC will be looking for more details about the deal – and the impact it will make on their businesses. The question here is how well the pieces of the new EMC/Dell organization will fit together, how the business units will change – and how quickly the combined entity can grow.

Those are perennial questions for extremely large events of industry consolidation – and gauging the progress may be made more difficult after EMC becomes part of the privately held company. Customers and channel partners will want to have choice, as well as integrated solutions that can be rapidly deployed. That’s why communications about the changes that will follow this acquisition will be essential in the next phase of the process to combine two of the best-known IT franchises in the world.

 

The entire Neuralytix team of analysts contributed to this analysis.