Dell and EMC – Better Together?

By Charles King, Pund-IT, Inc.  October 12, 2015

The announced plan by Dell (with assistance from MSD Partners and Silverlake) to acquire EMC comes at an interesting and challenging time for both companies. For Dell, the purchase constitutes both a milestone in the company’s remarkable journey since founder Michael Dell returned as CEO in 2007, and an ignition point for its next phase.

For EMC, the deal stands as the best chance to preserve and grow the unique organization that has evolved under the leadership of CEO Joe Tucci, and will also allow the company to leave behind the second guessing and obsession with quarterly earnings that is increasingly common in the financial industry and among institutional shareholders.

The deal’s $67B size ($24.05 per EMC share, plus a tracking stock representing 0.111 per share of the company’s holdings in VMware) will make it the largest in technology industry history, dwarfing the $25B HP paid for Compaq. But the Dell/EMC agreement is also different and more complementary to both parties than the one then-HP CEO Carly Fiorina pursued in 2000.

At the time, HP insisted that the deal was one between near-equals with numerous synergistic elements. But over time, as tens of thousands of employees (mostly from Compaq) were terminated, it became increasingly obvious that HP was primarily interested in holding off a surging Dell and dominating PC sales.

This new agreement has far fewer overlaps. Yes, storage will be a concern. But Dell’s primary efforts among small- to medium-sized businesses and EMC’s focus on large enterprises means there will be far fewer opportunities for conflict. In other areas, including systems, security and software, the two companies largely play to distinctly different crowds. Plus, EMC assets like RSA and Pivotal organization should notably deepen Dell’s efforts in, respectively, security and developer communities.

Finally, the pair shares a long history. From 2001 to 2011, Dell and EMC maintained a strategic partnership and served numerous common customers. That relationship ended after Dell began building out its own storage portfolio. But the companies continue to engage closely with mutual common business partners, including Cisco, Microsoft, Oracle and Red Hat. VMware qualifies as icing on the cake, since Dell has long been among the top licensers of that company’s software.

Innovative leadership

Both Dell and EMC have also benefitted from a commonality of innovative, out-of-the-box leadership. Michael Dell is one of the tech industry’s most legendary entrepreneurs, but he willingly and effectively shifted gears on his return as Dell’s CEO in 2007. In the years since then, he has retooled the company from being a PC-centric market leader to becoming a desktop-to-data center vendor of business solutions.

At the same time, Dell substantially expanded the company’s R&D efforts and dove headlong into strategic acquisitions, never a Dell strong point. The decision to take the company private in 2013 took many people by surprise, but Dell’s effort eventually succeeded, confounding opponents, including Carl Icahn, whom Time magazine had dubbed, “Master of the Universe.”

EMC’s Joe Tucci has a long history of successes that were inspired and fueled by unconventional decision making. In the 1990s, Tucci succeeded in helping Wang Labs emerge from a ruinous bankruptcy and engineered its sale to Gentronics. He joined EMC in late 2000, arriving just in time to help the company successfully weather the bust, then steadily drove EMC’s evolution beyond its enterprise storage hardware roots.

Under Tucci’s leadership, the company embarked on a number of transformational, sometimes counterintuitive acquisitions, notably VMware but also including RSA, Data Domain, Isilon, Greenplum, XtremIO and Pivotal Labs. It also pursued unconventional deals, like the partnership with Cisco and VMware that resulted in VCE, now the leading vendor in converged systems. That flexibility allowed EMC to explore and establish positions in numerous new areas while maintaining its focus on core enterprise storage opportunities.

The company also adopted a “Federation” organizational model under Tucci that enabled and encouraged innovative EMC acquisitions and business groups to flourish independently. This last point is important in relation to this latest news, since it reflects Dell’s approach to managing its own strategic acquisitions.

What are the challenges?

Most any business acquisition carries significant challenges, including melding corporate cultures, go-to-market strategies, product groups, sales organizations and more. The $67B size of the Dell/EMC deal mirrors some of the complexities the two companies face, but the fact that they have worked together closely in the past and share many mutual partners should help to mitigate some challenges.

The deal’s size should also lessen the likelihood of alternate proposals. Frankly, there are few companies with the wherewithal to pursue a counter-offer, and the few that do seem unlikely to proceed. Oracle, for example, could act as a spoiler, but the current deal could actually strengthen rather than diminish its own business.

HP has been rumored as a possible purchaser of EMC. However, Meg Whitman and crew have their hands full with dividing the company into two separate entities. Plus, there’s enough overlap between HP’s and EMC’s hardware and software portfolios that a Compaq-like bloodbath would be a real possibility. That would be a lousy outcome for both companies’ customers and reputations.

One area that does deserve close attention is the retention of key personnel. Over the past decade, EMC has built one of the deepest management/executive teams in any industry. Many of those men and women are probably wondering what a future at Dell holds, so engaging and assuring them about their value to the combined companies is a critical task.

Final analysis

A last point is the degree to which the deal suggests that something is fundamentally broken in the investment community. Despite massive challenges and industry disruptions, EMC has long been a profitable company that worked hard to benefit its shareholder owners. Despite that, activist investors, including Elliott Management, insisted that the company could and should operate differently.

With interest rates hovering near historic lows, the time is ripe for Dell to finance its purchase of EMC. But the fact is that this is the second time in three years that one of the tech industry’s top five vendors is exiting public markets for private ownership. Have investors’ and financial analysts’ expectations exceeded common sense? Perhaps. Will Dell and EMC be better off together than apart? Probably so. But if Dell’s offer succeeds – and absent a major challenge, it likely will – the available options for technology investors will have become notably poorer.

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