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Taneja Blog

Taneja Blog

Dell Buys EMC—Now What?

Everyone will have an opinion about Dell’s acquisition of EMC. Having seen many of these types of “mergers made in heaven” before and being deeply steeped in the transition taking place in the IT industry over the past decade, here is mine. 

Just like most acquisitions or mergers there are always plusses and minuses. The question invariably comes down to, “on the whole, will this be in the interest of shareholders, management, employees, customers and will the new company be better positioned for tomorrow?” The answers are never a yes or a no across the board. Often what is negative to employees is good for management and shareholders. Sometimes it is not. Sometimes customers suffer the most. In spite of statements that it is all done for the benefit of customers, more often than not such transactions are done to stem a decline, to fight for survival or to expand into new segments of the market. And often it simply comes down to feeding big egos who believe they must reign over massive enterprises and the fastest way to do it to combine entities. I have worked with both EMC and Dell for decades and I think I know their psyche well. While only time will tell how this transaction reshapes these two entities and the market, here are my initial observations (in no particular order):

 

THE GOOD

  1. Dell has excelled in selling into small and mid-size companies while EMC knows what it takes to sell into larger enterprises. The combination will produce an entity that can cover the entire spectrum of customers and markets. 
  2. Both EMC and Dell work cultures are brutal. Both expect results or employees do not survive. Contrast this to the cultures at HP or NetApp, which are vastly different but good in their own way. I think the cultures at EMC and Dell are similar enough that the combo could prevail. 
  3. Dell has an excellent server and PC product line. With the advent of convergence and hyper-convergence, EMC badly needed a server product line so as not to be too reliant on Cisco or Lenovo. HP has had a distinct advantage over EMC here. The combination adds the key missing ingredient in converged and hyper-converged systems. 
  4. This may seem like a trivial point but Joe Tucci has been looking to bring closure to his reign at EMC and this closes that chapter nicely for him. He found a home for EMC and now go about his retirement. 
  5. EMC has made earlier acquisitions in the area of all-flash whereas Dell had a gaping hole there. This fills that hole. Ditto for several other technologies. 
  6. Dell went through hell trying to become private and the effort was finally starting to pay off (frankly, we don’t have evidence of this in the market but we will take this at its face value from what Michael Dell said on the call). EMC would likely find that removal of Wall Street shackles is a big relief. The IT industry is undergoing tectonic shift the likes of which we have not seen in four decades. With new competitors like AWS, Google and Microsoft Azure, EMC/Dell will need all the flexibility they can muster up. Being private helps big time.
  7. VMware staying independent is a breath of fresh air. This was the only valid outcome for VMware; all other options would have killed it. This will make the industry continue to respect it for what it has delivered and what it can deliver tomorrow.
  8. The combined entity will now be able to produce a genuinely hyperconverged solution, using Dell servers, Scale io, VMware and other technologies. The Dell equivalent of VCE will likely get a boost in development, while the emphasis on Cisco based solution declines. 
  9.  I am not close to the security products from either company (and the networking products from Dell) but I suspect these are net positives for both companies. 
  10. IT industry goes through major swings every few decades. For three decades we ripped every layer of the infrastructure apart and defined interfaces so products from a variety of vendors could interoperate. We called it open systems. But the past five years it is clear the industry is back to developing integrated architectures in a bid to reduce costs and simplify the purchase, deployment and management of IT infrastructures. EMC was at a disadvantage relative to HP and IBM in this regard and its reliance on Cisco was increasingly getting worrisome. Dell fills some of these gaps. 

THE BAD

  1. The tectonic shift mentioned above is so brutal that neither Dell nor EMC has adequately addressed it so far. Neither offers a public cloud. Both have traditional storage products that are already struggling to survive in the new world of hyper scale architectures. Even the pressures from server SANs (like VSAN) are huge and massively negative to traditional storage. Yes, EMC has Scale io and Dell has done a deal with EVO RAIL and even with Nutanix but it is not enough. Sale of these products is detrimental to the sale of VNXs,  VMAXs, EqualLogics and Compellents. This shift to hyper scale architectures has been the biggest shadow draping these two companies to begin with and the deal does nothing to make it better. If anything it complicates the situation dramatically. 
  2. There is a massive overlap in the mid-range storage products. Dell was already reeling from the overlap between EqualLogic and Compellent product lines. Now the combined entity will have to deal with VNX in that same space. None of these is software defined. All three will need to be replaced with a new architecture to compete that are genuinely software defined. There is a reason while Nimble, Tintri, Tegile and others in that ilk are doing so well. Instead of getting a solution for this EMC/Dell just got their problem exaggerated. 
  3. Ditto for the data protection arena. Massive overlap here in backup and recovery, replication, data deduplication, cloud connections, and more.  
  4. Putting a layer of ViPR on top of traditional storage products is only a stop gap measure. Yes, EMC will now support Dell’s products more diligently than before but this doesn’t eliminate the need for genuine software defined products and there is nothing accretive in the merger about that (as stated above).
  5. HP and IBM are fighting their own battles. I suspect this deal buys them time to get their own houses in order, time that EMC was not letting them have with relentless pressure. This event may release some pressure simply because EMC will be distracted for the next 12 months, no matter what anyone says. 

In this new era of cloud, software-defined and mobile, selling traditional storage products will become increasingly more difficult. Now that burden shifts to Dell to make the transition. It would have been a hard transition for EMC or Dell alone; this makes the task an order of magnitude more difficult.

THE UGLY

  1. As previous acquisitions of the past era have shown again and again, acquisitions like this are not pain free. In fact they are horribly painful. Just rationalizing the product line will take a year, even with EMC’s finesse with past acquisitions. Hundreds, if not thousands of employees will lose their jobs, due to redundancy. The mid-range storage array and the data protection area will be the hardest hit. But so will many administrative areas. Now in the hands of Silverlake, the company will simply need to show progress and cost cutting is an integral part of this. The toll on people will hurt badly. 
  2. The historical record of mergers of two big traditional companies is a sad one. Sperry and Burroughs to produce Unisys. Acquisition of DEC by Compaq and the subsequent acquisition of Compaq by HP were both disasters of titanic proportions. As was the acquisition of Veritas by Symantec. And the list goes on. For those of us with long memories the words used were similar (synergy, “made in heaven,” efficiencies, alignment of thinking, and so on). In the end the only thing that mattered was who could fight harder and who could shout louder. The ultimate loser was unfortunately the customer and I would argue the shareholder, as none of these mergers produced value long term. In this scenario, EMC shareholders at least get a premium and pull out but how Dell employees will fare remains to be seen.  

 

These are a changing times. IT architectures are in an upheaval. Yesterday’s thinking doesn’t help. The names of enemies are not the same anymore. The new enemies are AWS, Google, Microsoft and maybe even Seagate and WD, to name a few. Joe Tucci has shown serious pragmatism in his previous acquisitions. He has done well integrating them into the mother ship. But they have all been traditional businesses with no overlap (Data Domain, for instance). This situation is different. Here we have two traditional businesses with plenty of overlap. To be sure, Tucci has been collecting businesses for the new world of IT as part of his “federation of companies” so as to be prepared for the onslaught from the new companies. But this transition is in infancy and the large majority of revenues for EMC still comes from traditional products. But Dell is further behind in this transition. And now the burden shifts to Dell to not only manage the act of combining the two giants but also to make this transition to the new world. This is non-trivial by any measure. Tucci’s work is complete. Unlike Tucci, however, Michael Dell still has something to prove: to build and run the largest private IT infrastructure com[any in the world. He must not be underestimated. Just look at the deal he put together. I am no financial genius but it is clear that Dell buying EMC for $67B, using private equity is not a game for the faint hearted. He got it done. Just as he did when he took Dell private. I think Tucci is happy to leave EMC in good hands and call it a day. This is as much about changing of the guards as anything else, as I see it. Michael Dell has a big task ahead. I wish him lots of luck.

  • Premiered: 10/15/15
  • Author: Arun Taneja
Topic(s): Dell EMC merger Acquisition SAN VSAN IBM HP VMWare Cisco Storage Virtualization

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