Analysis: Dell To Buy EMC For $67 Billion

The news is everywhere, and has been for days: VMware currently trades as.

Background

The implications and details of this deal are legion, and there is a wealth of detail out there, good and bad, so I’ll point you at the commentary I think is most worth bothering with rather than re-hash the same stuff here. My thoughts will follow. Do read these things, because it’ll give you the background to deal with what I talk about here.

• The official statement from Dell. Key quote: “The combined company will focus on rapidly de-levering in the first 18 to 24 months following the closing of the transaction, and on achieving and maintaining investment grade debt ratings.”
• The official statement from EMC.
• Some analysis by Chris Mellor at The Register. Chris is a smart guy who tracks the storage market closely, and this is a good piece on the product portfolio overlaps.
• Barb Darrow has written some good stuff over at Fortune. Try this piece on other potential suitors for a good lay of the land, and this one on why the deal doesn’t make a lot of sense.

The Federation Is Dead

Ignore commentary to the contrary. Berkshire Hathaway.

This is Tucci’s swan song. He gets to sell his pride and joy to someone he likes, rather than having it broken up and sold for scrap because of activist investors. The structure will be preserved temporarily as a fig leaf to cover Tucci’s embarrassment for having to bow out in this fashion.

Note the repetition of the word ‘synergies’. Synergies is a word trotted out to provide post facto justification for whatever the executives wants to do, and they are highly dependent on the assumptions used to calculate them. You don’t get synergies by keeping things separated, so there will be consolidation. The talk is of revenue synergies of three times the cost synergies, which implies cross-selling versus cost-cutting, but there will be plenty of both.

All Dell, All The Time

Dell branding all over the Alienware Australia website. It’s a sub-brand, not a standalone brand like Louis Vuitton or Head and Shoulders that lives inside a house of brands.

Dell keeps.

And that’s where I really start to scratch my head over this deal. Dell buying it?

Why Would EMC?

I can invent some logic for this deal, but I’m far from convinced that it’s an obviously good idea. There are huge risks to the successful completion of this acquisition.

EMC storage and Dell storage clash.

We know that what was EMCII will now be a Dell EMC has built up over there.

Cloud

Cloud is why this deal is happening. Dell has no real cloud story to tell. Yes, they do managed private cloud for some customers, but that’s just managed service provider stuff with a cloud label stuck on with gaffer tape.

Let’s be clear: when I say cloud I mean AWS and Azure. enterprise ability to do cloud.

VMware’s vCloud Air thing (can someone please fix their naming?) but it’s struggling to take off. Their core market is infrastructure admins who are being flanked by developers flocking straight to things they can program directly. AWS Lambda removes any need to worry about knowing anything about infrastructure at all, for example.

This deal buys Dell (and what used to be EMC) time to sort out their cloud plans. Dell will now have a very strong storage portfolio where before it was fairly weak, and the storage market is growing strongly, particularly flash and scale-out style (e.g. Server-SAN). Dell gets access into enterprise accounts with healthy margins that it can use to finance longer term strategies and R&D. The PC and server market isn’t providing enough free cash to finance whatever Dell has in mind, but with access to these accounts, Dell can win bigger, better deals and make more cash.

Security is a big growth area, and Dell now owns a well known brand: RSA. The IPO of Dell’s SecureWorks company makes no sense to me in this context, unless Dell wants to swap out SecureWorks for RSA for some reason that I don’t fathom. This is a puzzler.

Networking is a weak point for both Dell and VMware. Dell need a more compelling story here, but they’re working on it. I expect to see a networking acquisition or two to fill in the gaps on the converged infrastructure portfolio. I’d also expect VCE will get sold off because I can’t see a compelling reason to keep it other than cashflow, and a quick cash payoff from the sale is more needed by a debt-laden Dell.

Speculation Time!

Look at the other EMC businesses: Virtustream, Pivotal. These are all cloudy-style businesses, but in a federated structure, they can’t be combined together properly. Tucci couldn’t abandon the federation structure he’d built without breaking the company, and Elliot and friends would have crucified them. No, now that EMC is basically private, the disparate parts of a cloud plan can be brought together.

That’s what I imagine the plan is. Actually pulling it off is a massive challenge, because of the head-start that AWS and Azure have.

I can imagine a line of reasoning: If Dell can use its “we play well with others” approach to embrace and extend both clouds to build a platform on top of them, they might have something. They can sell all the value-add bits that enterprises need–assurance, Microsoft is being a lot more open these days, and collaborating with long-term friends Dell makes better sense than buddying up with AWS who are a major threat.

Enterprises can’t move everything to cloud tomorrow, and they need help to do it. They have a bunch of stuff that will stay on site for a while yet, and they need a bridge to public cloud. That’s why Accenture is buddying up with AWS, and I’m sure someone is looking to do the same with Azure. EMC and Dell’s combined consulting abilities should take that on, and maybe hire a few of the ex-EDS people that HP is getting rid of. There will be a period of hybrid cloud, and there’s money to be made in that transition period.

No one but the inner circle at Dell actually know what the plan is, but it’s going to be fun to watch for the next few years.

Hang on to your hats! It’s going to be a bumpy ride.

This article first appeared in Forbes.com here.