Yesterday, Dell and EMC announced a “definitive agreement” about Dell’s plan to acquire EMC. Dell and EMC are just two factors in that equation, the third one is VMware. EMC owns 80% of the VMware shares.
In a press and analyst conference call held right after the announcement, Michael Dell and Joe Tucci, respectively the leaders of Dell and EMC, provided some high-level information on the deal. However, that call left more questions than answers.
Let’s start with the high-level storyline. First of all, there was no sustainable vision for the combined company unveiled, aside from the usual buzzwords. However, when combining two giants, both from market segments under pressure, the result will not necessarily be positive. Yes, there are now servers, storage, and (with some minority stakeholders) virtualization combined in one entity, allowing for creating new offerings for cloud, on-premise, and “hyper-converged” infrastructures. But it’s in software, as in “software-defined”, not in hardware, where all the action is. On the other hand, there is a need for market consolidation. Being the one who consolidates is clearly better than being consolidated.
Aside from that, the most important (because it’s the software) part in that combination is the one not fully owned, which thus can’t be fully integrated: VMware. On one hand, Michael Dell praised the advantage of a company not being listed, on the other hand they explicitly stated that VMware will remain listed. Where is the logic?
The argument I read today that the “new Dell” will enjoy a freedom HP can only dream of clearly is valid. Being a privately owned company allows for longer-term decisions than being public. Anyhow, altogether with VMware, there would be even more freedom.
The most logical answer from my point of view would lead to a dilemma: They might need to reduce the stake in VMware to pay back some of the debt of the merger. However, doing so would have a negative impact on the synergistic potential of the overall deal.
An explanation that doesn’t convince me is that buying VMware shares back would have made the deal too costly. Yes, that would have added some billions to the 67 billion USD deal. But even with a significant premium, we are talking about 10-15% of the current deal size. Not that much, when looking at the relative cost of buying back VMware shares.
More reasonable are explanations that there either hadn’t been time to make a decision on how to proceed on that issue or that one or some of the strategic investors in VMware weren’t willing to sell. And pushing for a squeeze-out is a tough task.
However, there is another explanation: In the current construction, VMware retains its agility. This agility is key to success in a market segment where innovation is key to success. On the other hand, with having Dell, a privately owned company, as the majority stakeholder, decisions are anyway faster than before. Fully integrating VMware at that stage bears the risk of slowing down VMware, aside of the potential negative impact on VMware’s large partner network. The construction chosen from that perspective is the best option. The organizational impact of the merger is restricted to integrating Dell and EMC, while VMware can move forward (more) autonomously.
During the call, it was also stated that no information on other valuable assets would be unveiled now. These valuable assets include, among others, the software & service business of Dell and RSA, the security division of EMC.
However, there are some questions behind that. The main one is: Will the converged Dell/EMC become primarily a hardware business with a majority share in VMware or will it become a combined business of hardware, services, and software? From my perspective, the latter approach is the only one that has a future.
Such an approach then would raise two more questions:
- How to deal with the overlaps between the portfolios, particularly around IAM (Identity and Access Management)?
- How to grow the services & software business, both organically and inorganically?
When looking at VMware, EMC/RSA, and Dell Software, all of them have IAM offerings. When looking at VMware Identity Manager, Dell Cloud Access Manager, and RSA VIA Access, there is overlap. When looking at RSA and Dell, there is significant overlap between RSA VIA Governance and RSA VIA Lifecycle on one hand and Dell Identity Manager on the other. With VMware not becoming fully integrated (as of now), the overlap with the VMware offering will remain anyway. But what about Dell versus RSA?
Another question is around growing services & software. From my point of view, this is the key success factor for this acquisition. But where to move from here? Clearly, aside from information security that has become ubiquitous, the main area is around software-defined “anything”, creating a central management and governance across the entire infrastructure. This is more than the SDDC (software defined data center), because it goes beyond the data center. My perspective here is that such a move on one hand will require further acquisitions and, on the other hand, will mandate tight integration of VMware as the company of the three (Dell, EMC, VMware) that is most advanced in that area. However, the latter can be done in the construction chosen for that deal – and the benefits of VMware being very agile clearly outweighs the disadvantages of not fully integrating VMware.
My colleague Dave Kearns added another issue around that deal: corporate culture. EMC is based in the Boston area, while Dell is “Texas culture, even Austin culture”, as he stated. He added: “There hasn't been a combination like this since Compaq acquired DEC - and remember how badly that went.” I leave this comment as is.
There are clearly many open questions now. Dell will have to deliver answers soon – they promised to do so and I’m definitely curious to hear the answers. With the information available now, it is too early to rate that deal and the consequences for various products and their customers. At the high level, driving consolidation can be rated positively and leaving VMware listed also makes sense. Let’s wait until more information becomes available on further details. We will follow this topic closely and keep you informed.
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