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Executive Summary

EMC World 2016 was held in Las Vegas May 2nd – 5th.  Attendees were keen to hear more about the merger between Dell and EMC and how it will affect partners and customers.  This deal has several unique aspects to it, which will have an impact on the combined business going forward.  As the industry continues to consolidate, “business-as-usual” is not an option.  No doubt, synergies will result from the Dell EMC merger.  However, how it handles the integration piece will make all the difference.

Introduction

The merger between Dell and EMC was big news when it was announced late last year. In fact, it was top-of-mind for many of the attendees at EMC World held during the first week of May in Las Vegas, NV. Everyone was especially keen to hear about how the integration piece would be handled, given that this is traditionally one of the most difficult pieces of the mergers and acquisitions (M&A) puzzle.

On hand at the conference to discuss the merger were Joe Tucci, Michael Dell, Howard Elias (leading the integration team at EMC), and Rory Read (Chief Integration Officer at Dell).

There are three obvious anomalies to this deal:

  • Two large companies of roughly equal size merging into one;
  • A private company buying a public company; and
  • Disparate corporate cultures.

Company Size

When a company undertakes business case analyses to determine whether or not a merger makes economic sense, it’s often very difficult to meet the level of value-creation needed to justify the purchase. This is true even when a larger company purchases a smaller one. However, the bar is set even higher when the merger involves two large companies of roughly equal size, because the cost/benefit analysis must yield numbers that are more difficult to attain due to the higher purchasing price of the deal. If the numbers do not add-up then the deal does not happen. The fact that this deal was even pursued indicates that it overcame a lot of hurdles to make-the-cut.

This is not the first merger between two behemoths (e.g. Oracle and Sun). In fact, the sheer size of these deals is becoming more commonplace, despite additional antitrust scrutiny. In this case, approximately 170K employees worldwide are coming together in this massive deal, although the executives were vague regarding the inevitable lay-offs that follow M&A activity. While a deal of this size often presents a greater risk to customers, partners, and employees, Neuralytix believes that the due diligence required on both sides shows that they’ve done their homework and that synergies can be realized by combining forces.

Private buying public

It is big news when a company goes public.  Big fan-fair often follows as the excitement builds related to stock price increases. It’s viewed as confirmation that a company has “made it.” However, taking a public company private doesn’t receive the same kind of “love” in the business press. It’s often cast in a negative light, presumably indicating a company’s attempt to “get its house in order.” Inevitable speculation follows, since quarterly earnings calls are no longer required. “What are they hiding?” the media wonder. As a result, many have now been conditioned to believe that the end-game should be to go public again as some kind of sign-post for success.

However, there are actually many advantages to taking a company private, as Michael Dell is well-aware. For example, long-term planning and strategic initiatives are now possible; the type of strategic planning that can result in revolutionary innovative advances, instead of incremental evolutionary steps.  This one point can mean the difference between being a market-maker or merely a market-participant.

However, what makes the process so difficult is the ability to finance such an undertaking. Now that Dell has made this transition, purchasing EMC puts the combined companies in a unique position to take advantage of fast-moving trends and temporary market conditions without the pressures associated with being a public company.

Both companies indicated that no projects were affected by the merger and that the research and development (R&D) budgets remained intact. This is good news for the continued development of innovative product offerings and delivery models so as to make-the-market, not just be a part-of-it. It also helps to explain how Dell anticipates $4B in synergies from the merger from day one (unrelated to any potential lay-offs, etc).

However, it’s curious that the merger will result in two companies (Dell Technologies and Dell EMC).  Other technology companies have tried similar approaches, for example HP, but creating separate entities is a bit puzzling if true synergies are to be realized. While it’s important to maintain the branding of well-established products (at least in the beginning), a combined branding would make more sense in the future rather than distinct naming conventions.

Corporate Cultures

While Michael Dell insists that the corporate cultures of the two companies are quite similar, he cited only ‘customer focus’ as the basis for such a statement. It’s easy to be skeptical.  Just because both companies may have the same goal in mind doesn’t mean their approaches to attaining that goal make them similar. In fact, in some ways they seem like night-and-day, most notably in the area of Go-To-Market (GTM) strategy (sales and marketing, promotions, and the channel). For example, EMC’s marketing approach is more aggressive than Dell’s, and Dell has historically taken an incremental approach to the channel compared to that of EMC. Nonetheless, the combined company expects the new, single channel to go live in February 2017. It should be interesting to see which approach is adopted.

Recommendations

  • Neuralytix advises Dell EMC to continue to focus on software-defined solutions and open-source. Coupled with a larger channel presence and an assertive single GTM strategy, Neuralytix expects to see continued, even accelerated, innovation and market-making strides well into the future.
  • Dell would be wise to maintain a strong relationship with Joe Tucci (at least for the first year), similar to how it handled its acquisition of Compellent a number of years ago. This would help to smooth the transition, which is the epitome of business continuity. Mr. Tucci expressed that he does not have an official role in the new company at this point in time.
  • Retain and re-assign as many employees as possible. While the combined company will have its own corporate culture that develops over time, existing employees are better-placed to act with agility and flexibility, because they know the inner-workings of their respective companies. Therefore, their knowledge should be extrapolated to new areas (not wasted). If vendors can take the time to train external channel partners and the customers who purchase their products, then they can “show some love” to their own internal folks by re-training them.

Summary

Despite the anomalies described above, there is minimal overlap in the product offerings and channels, which will appeal to different segments of the market and afford the merged companies the ability to address the needs of growing businesses without gaps in their portfolios. Their customers can grow along with this merged entity. This will likely contribute to the synergies (mentioned above) derived from scale, not workforce reductions. If the merged organization is able to seamlessly integrate the various components successfully, customers are likely to reap the benefits from an innovative and expanded portfolio of offerings.

 

Notes

  • While the closing date of summer 2016 is anticipated, additional regulatory approval required for China is still pending and is expected shortly.

Related Research

EMC World 2016 – Day 1 (Neuralytix, May 2016)

EMC World 2016 – Day 2 (Neuralytix, May 2016)

EMC World 2016 – Day 3 (Neuralytix, May 2016)

EMC MyService360 – A Simplified Approach to Customer Support & Service (Neuralytix, May 2016)

EMC World 2016 Product Announcement Analysis (Neuralytix, May 2016)

Dell EMC: Channeling Success (Neuralytix, June 2016)