Dell EMC merger could be a win-win for all

S Ramdas

The Wall Street Journal reported about speculations around a potential Dell EMC merger on Wednesday.

While reports of EMC being in talks with both HP and Dell have been doing rounds for past one year, many in the industry feel that Dell is very close to clinching the deal and a formal announcement is imminent.

What is not yet known are the details of the Dell EMC merger. There are three possibilities emerging.

•    A complete Dell EMC merger: This if happens would be the biggest in the history of information technology since EMC is valued at a little over $50 billion and with speculation of a sell-out, the valuation is likely to go up.

•    A partial buyout of EMC assets by Dell: EMC will likely shed-off the no-more glamorous product business around enterprise storage hardware while some of the divisions and joint ventures such as Pivotal Software, RSA Security, VCE among others will spin off and become independent entities like VMware.

•    Strategic investment by Dell and private-equity firm Silver Lake: This keeps EMC identity independent but provides management control to Dell, thereby allowing current Chairman Joe Tucci to retire gracefully. This is the least likely scenario to emerge.

Valuation:

There are several questions wanting answers. Dell which went private at a valuation of $25 billion in 2014 is known to have debts of around $11.7 billion, according to FactSet, a financial research firm. So how will Dell fund a potential $50 billion which is essentially the market capitalization of EMC.

EMC has been described as an undervalued stock for many years by analysts. The $50 billion valuation analysts note does not really justify its ownership in Pivotal Software or VMware. With VMware having a valuation of $28 billion, an 80 percent stake owned by EMC itself is valued at $22.4 billion. EMC also owns 84 percent in Pivotal Software valuation is said to have touched $ 10 billion according to finance research firm VC Experts. This puts its stake in two independent companies at $30.8 billion

With 2014 revenues of $24 billion for its infrastructure business and a market share of around 30 percent, EMC’s valuation of its core business infrastructure business being just around $20 billion looks dwarfed compared to that of competitor NetApp whose annual revenues of $6 billion fetches a valuation on books of $9 billion.

For private equity firm Silver Lake, Dell’s likely partner in raising the capital to pull of this purchase EMC buyout in whole or in parts must look attractive.

Future of enterprise storage:

Enterprise hardware market which once upon a time was one of the most lucrative markets is under threat, despite the exponential data boom. EMC’s hardware business has only grown by 2 percent over the past two years; this does not provide a great signal.

Perhaps the biggest threat for the business come from the new trend of software-defined-storage (SDS) where VMware itself has been telling enterprise customers to use their products in combination with commodity hardware instead of pumping money in buying enterprise storage hardware.

There are also a number of new storage software vendors such as Nexenta, Pivot3, Coreid, Datacore trying to grab some share. In addition IBM, NetApp and RedHat are also trying to shift dynamics with their own SDS strategy.

Then there are hyper converged  stack vendors such Nutanix and Simplivity who have a strong storage story especially around virtualized workloads.

And finally there are a number of new players in the All Flash and Hybrid Flash arena including Pure Storage, SolidFire, Kaminario, Tegile and Tintri. All of them claim to own technology that is better than that offered by legacy players in enterprise market.

And at the same time, recent Pure Storage IPO not being a great success does not augment well for the stand alone storage market.

Public cloud vendors such as Amazon, Google and Microsoft offering pay-as-you go model for storage is an obstacle for potential growth too.

And in this scenario, a purchase of EMC is likely to be the best bet for EMC shareholders and customers.

The Dell picture:

Dell does have a strong portfolio in the enterprise storage market following its acquisitions of vendors such as Equallogic and Compellent. But with market shares still in single digits today, even the most optimistic Dell supporter would not bet on Dell organically growing to become a category leader across enterprise storage soon.

For Dell, the gamble will not be without risks. Dell think tank should also be wary of recent history where several high profile acquisitions such as Nokia by Microsoft, or Sun Microsystems by Oracle has not resulted in any reasonable dividends.

However unlike these buyouts which were of companies which were on steep decline EMC is the clear market leader in enterprise storage market cutting across almost all segments.

While the growth in enterprise storage market is likely to be limited, the data boom will continue and many segments such as BFSI, telecom, manufacturing, defense and critical services are hardly likely to abandon buying enterprise hardware or software soon.

That aside Dell is on a mission to build critical mass across the enterprise, and EMC buyout would give Dell that fillip to emerge as the default market leader across servers and storage, with a very strong position in the data center space.

Dell is just a few points behind HP in the server marketplace, and a strong server-storage portfolio will help Dell edge past HP.

Future of the EMC Federation:

One of EMC’s best moves in the last decade was to create separate companies or independent divisions which are collectively called EMC Federation.

While VMware is publicly listed and is an independent company, RSA Security continues to be a division of EMC but holding an independent identity. Similarly Pivotal Software that focuses on cloud and agile development is jointly owned by VMware and EMC is an independent company and is likely to go in for an IPO. Other companies include VCE which focuses on converged infrastructure and Virtustream which focuses on virtualization technologies.

The beauty of the EMC Federation lies around the loosely coupled inter-relationships between the various entities. It allows VMware to work with EMC rivals NetApp or HP, while through VCE VMware works closely with its competitor Citrix.

A Dell overall buyout need not disturb the federation, but a partial buyout of just storage hardware could potentially spoil the existing synergy. Hence for Dell a total buyout would be far more attractive than just buying the storage infrastructure business.

If this flies:

Without doubt it will be the largest merger in history of information technology. In all likelihood the money which Dell will need to finally raise could be closer to $60 billion than the $50 billion being estimated currently.

EMC also has relationships with Dell’s direct competitors including Lenovo and Cisco. Though Cisco has exited VCE, there are a number of customers jointly owned by Cisco and EMC.

Similarly Lenovo sells EMC in China and some of the emerging markets. The future of these alignments are dicey. There could be strong counter moves from the competition to protect their turf as soon as something is formally announced.

This would automatically put pressure on Dell’s competitors who may also look at acquiring competition. Stand-alone storage companies will be under pressure. A potential NetApp buyout by Cisco or HP is another probability in the horizon. This will not be the end of the story, just a new start.

The article is authored by S Ramdas, CEO, Netzary Infodynamics