Dell and EMC: Our Take on the Merger of Titans

In case you’ve been living under a rock or don’t follow M&A news, Dell has orchestrated at $67 billion takeover of EMC.  While thoughts around the proposal have been mixed, the reality of this deal will ultimately transform two organizations with fixed growth prospects into a major player for enterprises and organizations that have not adopted the solutions based upon the Open Compute Project platform.  The larger commercial server vendors have suffered from limited capability to grow market share after competitors have been firmly entrenched within a given environment.  The old thought process of “you don’t get fired for buying <insert vendor of choice here>” continues to stifle organizations from thoroughly understanding the platforms and solutions offered by competing, non-incumbent vendors.  In our opinion, Dell has made great strides to provide cost-effective hardware solutions that have a specialized focus on support capabilities throughout a given platform’s lifecycle.  Solutions such as the VRTX Shared Infrastructure Platform were available before hyperconverged solutions based upon VMware’s EVO:RAIL hit the market.  The fact that Dell went private and has made adjustments to improve the agility and focus of its organization ensured that it was ready for consuming an organization such as EMC.

What is it that Dell is getting in this deal?  Most analysts and critics are focused on EMC’s market-dominating storage portfolio as the impetus for the acquisition.  Better understanding EMC’s full portfolio provides a clearer picture of potential revenue gains above and beyond the storage side.  While Dell has acquired a myriad of independent storage vendors (EqualLogic, Compellent, etc.) in the past in an effort to compete with the likes of EMC, Netapp, and others, the reality is that enterprises aren’t willing to deviate from the vendors that have provided solutions for years.  A wholesale switch of storage platforms and technology normally requires a falling out between leadership at a given customer’s organization with the incumbent vendor.  By procuring EMC, Dell gains top positioning in the current storage market and can potentially improve sales of its server product line.  It would not be too much of a stretch to imagine the VCE vBlock product line eventually shifting away from Cisco compute to utilize in-house server platforms.

This acquisition does raise concerns related to the cost model and long-term viability of Dell’s existing storage platforms.  Significant overlap in feature sets and capabilities of EMC’s product line and Dell’s current product line will result in products being phased out entirely.  The potential to spin out storage products that don’t have a place within the new Dell-EMC entity won’t have many potential suitors.  HP has its own storage product stack that compares favorably against competitors in the market.  The recent acquisition of Dot Hill Systems by Seagate may impede future generations of the entry-level P2000 SAN.  Procurement of EqualLogic from Dell would provide HP with the means to maintain a solid, entry-level solution if Seagate decides to enter the SAN market with Dot Hill’s technology.  The rest of Dell’s existing porfolio may be shuttered entirely in an effort to maximize efficiency and profitability.

The true gem that Dell obtains as part of the deal is VMware.  Although current shareholders are experiencing pain as the process of this merger takes shape, the reality is that far too many enterprises are tethered to this market-leading hypervisor platform.  Unless organizations have the technical expertise to execute in a manner similar to Apple, VMware’s “stickiness” will ensure a continued revenue stream and future growth for the Dell-EMC organization.  The remaining pieces that consist of RSA, Pivotal, and Virtustream can be well integrated with existing Dell entities.  The potential to place these remaining members of the federation under an existing umbrella will help create more comprehensive solutions for current issues being tackled by the enterprise.  Once all is said and done, Dell will have one of the most complete solution sets available to businesses of varying sizes.

Rumored continuance of Dell’s divestiture of its PC business requires additional consideration.  While margins have been minimal on low-cost client compute offerings for far too long, there’s merit in maintaining a single throat to choke when issues arise.  Recently, the product line for Dell’s client compute offerings has dramatically improved from the presentation and usability aspects.  The newer XPS laptops present a viable alternative to the Apple laptop product line for those looking for a balance of form factor and features.  The recently revamped Chromebook hit many of the right marks in the presentation and performance arenas.  As businesses continue to shift from traditional Windows endpoints to lower-cost, longer-living endpoints that are amplified through centralization of desktops and business systems, the uptake in Chrome OS solutions and other thin clients will require vendors to go to market with the entire product stack.  HP’s split into the client side and the enterprise side runs the risk of hurting sell through of complete solutions in the long run.  Dell would be wise to not divest its client computing business, and instead focus on delivering a higher quality product with improved margins.

It will be interesting to see which additional rumors bear fruit in the IT merger and acquisitions space for the remainder of 2015.  How will such developments impact strategic roadmaps for large companies?  Will we see dramatic shifts in hypervisor market share as a result of this merger?  Will EMC competitors see an uptick in sales or market share that can be sustained over time?