The Dell-EMC Knot and Footnotes for CIOs

Pratima H

YES, it’s out there in the open. On the trails of other big-industry shake-ups and shake-outs like Dell going private, HP dancing the splits, Microsoft fiddling with a platform avatar, IBM donning a software robe and Google shuffling itself onto a new name-plate, now we are into another major re-incarnation. Yesteryear’s PC giant Dell and quintessentially a storage-major EMC (of course, they have gone past that uni-polar image with VMware, RSA coming into the fray) are shaking hands big time. To the tune of $67 billion (a technology industry record by the way) and this would be quite a complex transaction entailing a tracking stock representing EMC’s stake in (publicly traded) VMware, cash from private equity firms, new debt from investment banks, and investment from Michael Dell himself as analysts read further.

But what this huge tech-industry hug boils down to are some questions that still hang in the air.

Before we zoom down on them, a quick guess-making on the big picture.

What’s the ‘why’ in this story?

Seasoned analyst and adviser Rob Enderle from The Enderle Group expands this with a delicious backdrop. “Michael Dell and Joe Tucci are old friends and remain in contact with each other. Tucci feels that the biggest mistake EMC ever made was losing Dell as a partner because they wouldn’t build the hardware Dell wanted to build for the mid-market when they wanted it built (ironically after Dell left them to build their own, EMC found they needed to build the hardware anyway). Tucci envied Dell’s going private because of the massive pressure to break up the company he had so painstakingly built but didn’t think he could take EMC private successfully. This last part is largely because Tucci wanted to retire but had been held because the EMC board wasn’t able to locate a good replacement that would meet both the board’s and Tucci’s requirements.” He assumes as he dives into more angles.

In other words, HP had been trying to get EMC to buy them and Whitman had cut the company to the bone to make it more attractive but Tucci can see that buying HP wouldn’t have reduced his problems it would have created more of them. Enderle elaborates that this likely started the thinking on some kind of acquisition or merger but EMC couldn’t be the buyer if Tucci was going to step down. “So when Tucci and Dell chatted, or emailed, they came around to the idea of Dell buying EMC. This basically solves all of Tucci’s problems (though I expect he’ll take a seat on the new Dell board), it leaves HP gutted with no one (other than possibly Oracle), to buy them and Dell emerges as the most powerful hardware vendor in the technology market.”

Craig Stice, Senior Principal Analyst, Compute and Server Electronics, IHS interprets this announcement as the deal that could shake up the technology market in a significant manner; more so as other large tech companies (such as HP and IBM) have announced they are divesting or aiming to become smaller players.

“The Dell and EMC together will create a ‘mega-technology company’. Since Dell went private two years ago, they have been able to at least maintain their market share within both its respective server and their PC business, but have struggled to grow within the large enterprise and higher margin markets. EMC is a long-time leader in enterprise storage solutions, but have been challenged to keep up with new trends and cheaper data center storage costs in this rapidly changing and dynamic market. IHS believes that together as one entity, Dell and EMC will have one of the most complete and unified portfolios, which should provide them additional reach into larger business opportunities they may have not had access to as individual companies. Allowing them to better compete against the likes of IBM, HP, and Cisco in the growing trend of unified IT solutions.”

Ok, got it. So now that the mega-story is taking shape, here are some immediate doubts:

What will be Dell’s Cloud plans from here on – the kind that swim into Hyper-scale and public cloud waters, now that VMware is in the kitty?

How will Dell leverage the ‘crown jewel’ - VMware – as it is being tagged so by many industry watchers?

Oh yes VMware. Where does it leave VMware and its strategic direction now, specially its partner ecosystem and VCE play?

How soon would product lines be cut/rationalised/consolidated in order to play well on the bigger basket? Or is there another way to avoid partner/product overlap?

Would it be good news or bad news for names like HP, IBM and AWS?

What is Cisco thinking right now – for its networking iron and possibility of still derailing the deal before it is cemented?

But the most urgent one is this – what should enterprise customers be concerned about?

For the Enterprise Guys

Forrester analysts Glenn O’Donnell, Richard Fichera, Dave Bartoletti, Merritt Maxim and others have a suggestion-list ready for those I&O leaders with significant data center infrastructure investments (i.e. if your company is more than 10 years old) and they recommend that for next two years, among other things, if you intend to stick with VMware, prepare to accept Dell gear.

If we assume that Dell will succeed in holding onto control of VMware, then friction will increase with Cisco, HP, IBM, and other partners. That makes Forrester’s think-tank infer that VMware cannot remain truly agnostic and will be assimilated more closely into Dell within two years. So they advise: “Keep Dell on your shortlist for converged infrastructure private cloud. The new Dell will continue to build converged infrastructure for private clouds in partnership with VMware.”

Enderle reasons that both EMC and Dell are executing a strategy to provide for cloud service providers not being one with the strongest solution being VCE which can become a cloud service provider hardware solution in a box and arguably far more robust than the stuff they are building themselves.

A view-point from another market player Hitachi will fall in place here. HitachiData Systems feels that while the Dell/EMC news is not a done deal yet (expected to close in May-October 2016), we expect further consolidation, churn and turmoil amongst the pure play IT organizations to better find a way to stay relevant in an ever-changing landscape. “This usually doesn’t bode well for customers who need partners that are focused on helping answer the challenges facing their business. In this case, we can expect this merger to keep both companies distracted for a good period of time and we can’t expect too many innovations that will help customers in the near term. At Hitachi, we will continue our long-term strategy for Social Innovation, and will extend its leadership in the massive opportunity of the Internet of Things That Matter.”

While we are at Hitachi, what if you were thinking about Cisco, HP, Amazon, Microsoft and well, VMware?

Collateral Damage or The Opposite?

Since EMC contributes its traditional strength in storage, VMware’s virtualization portfolio, VMware’s NSX software-defined networking (SDN) technology, and with Dell adding its weight in x86 servers; the combined firm will use its collective install base (experts value EMC’s on-premises infrastructure business alone at approximately $100 billion over the next decade) to compete effectively with titans Cisco, HP, Huawei, and Lenovo for this still-enormous legacy market.

Forrester analysts however caution that the future of its collection of cloud properties remains unclear.”Dell and EMC have not publicized explicit plans for the “EMC federation,” the collection of significant acquisitions (Pivotal, RSA, and VMware, principally) that had significant autonomy while being tied to the EMC corporate bottom line. In particular, the combined firm has not committed to merging or otherwise rationalizing EMC Virtustream and VMware vCloud Air into a single service portfolio, which means there’s little impact on the public cloud market.”

As to Cisco, Enderle distills that Dell should effectively replace Cisco as the server component and one of their little known units builds custom machines for industrial/medical applications and they would be able to provide a custom solution for VCE that could do very interesting things for that packaged product.

Interestingly adjacent players (specially in converged infrastructure and storage space) like Hitachi seem not be perturbed the wrong way.

“While the enormity of the Dell/EMC deal is certainly eye-opening, the logic and strategy behind it are not all that much of a surprise. EMC has been facing a tremendous amount of pressure from its investors to give them a financial return. Industry dynamics such as Mobile, Cloud, Big Data and the Internet of Things have changed the game for pure play IT organizations. They're struggling against new pressures, cloud being the most significant, while scrambling to become relevant among the massive opportunities around Big Data and IoT.” the company states.

There are implications for Hitachi too. “Hitachi is on a different path. We're not a pure play IT company. We're one of only a few global organizations (think GE and Siemens) with both the industrial and IT expertise to truly lead in the $7.1T IoT opportunity: and we're well on our way. If you look at where we're investing, you'll see a pattern emerge. Pantascene, Avrio, oXya and Pentaho represent our most recent acquisitions, and all are focused on extending our capabilities in cloud, Big Data and IoT.”

In all likeliness, the new Dell, as we see in Forrester’s reckoning, will have converged solutions to power private clouds, a leading hosted private cloud in Virtustream, and a second-tier public cloud in vCloud Air. Yet, these won’t be a match for hyperscale public cloud leaders. Amazon Web Services, Google, IBM, and Microsoft can continue to roll in relief and the hyperscale leaders simply may not be interested in the new Dell’s premium-priced hardware.

The After-Math(s), specially for VMware

Dell’s acquisition process tends to leave the acquired companies pretty much alone and Enderle’s prognosis reveals that Dell effectively becomes their entire board and influences strategic direction and assures performance. “So impact on VMware would be minimal though it moves Pat Gelsinger, who was groomed to be Intel’s CEO, into a stronger position in line to run the new combined company as his skill set from Intel suddenly got a ton more valuable (recall that he is currently VMware’s CEO). And I would expect a closer relationship between Dell and VMware will result (though it was already pretty close).”

In Forrester’s diagnosis, the federation approach has allowed VMware to maintain a loose association with the hardware platforms beneath its software and thus a rich channel with EMC competitors. But overall, the federation has failed — it confuses customers and irritates investors. Both groups, and especially cloud customers, want better integration so they can deliver at the speed developers and end customers demand. Dell has expressed interest in the model, but Forrester predicts that the new Dell will either assimilate or spin off the federation.

The VCE label comes into spotlight here. VCE, the EMC-Cisco-VMware joint venture, formed as Acadia in 2009, that generated an estimated $1 billion in sales at its height combined Cisco’s Unified Computing System server-networking platform with EMC storage and VMware’s software to produce a converged infrastructure (CI) called vBlock. Forrester calls it a nice packaging and simplification of the technologies but adds how it comes with a high price tag. “Political tensions have further complicated the venture, with Cisco selling its interest to EMC in 2014. Since the new Dell has its own CI solution, Forrester expects it to discontinue the VCE venture.” That’s how Forrester analysts slice it.

As to IHS, on the whole, while financial success is still an open question mark, both companies, individually, are considerable in size, and both already have extensive product portfolios. “Integrating these portfolios will likely require major changes and some amount of scaling back in any doubling of efforts. IHS doesn’t believe initially this will drive divesting into a lower-margin server or PC business from Dell, but, if down the road and financially, the low margin business becomes too much a burden, then it is possible.” Stice notes.

Stice also picks out the immediate challenge of the integration of the two massive companies. “The newly combined entity will have to maintain cash flow to pay off the debt it will be accruing, while still being nimble enough to react and adjust to this market. Being a private company under Dell does allow them greater flexibility as they won’t have to disclose or answer to shareholders, but as is the case, the bigger the ship becomes, the harder it is to turn.”

Let’s see whether and how this high-octane dust will settle around the many corners of the industry. After all, there are more stakes, ripples and questions than $67 billion here that are flying about.