A year later: Pros and cons of the Dell and EMC merger
Our experts take measure of the Dell EMC acquisition, the storage and technology merger of the century, a little more than 12 months after the deal closed.
Dell bought EMC more than 12 months ago in the largest corporate transaction in IT history. The dust has started to settle, giving us a clearer -- if still somewhat murky -- picture of how the deal from which the behemoth Dell Technologies emerged will pan out.
Here, we offer two different takes on how it went during the past year. TechTarget Storage Media Group Editorial Director Dave Raffo takes the pro position, looking at the positive aspects of the Dell and EMC merger. Senior News Writer Garry Kranz plays devil's advocate, laying out a more negative view of the combined company.
What effect has the deal had on Dell and EMC products? How about the present and future of VMware? What are the consequences for the storage market in general? Let's find out.
Pro: Right deal for the wrong reasons
Did Dell acquire the world's largest storage company a year ago? Or did EMC pick up a server vendor to round out its infrastructure strategy?
It doesn't matter: Either way, the timing was perfect.
The $60 billion-plus deal came as convergence of discrete servers and storage was giving way to hyper-convergence, and the new Dell Technologies put all the right pieces together. Dell EMC–the combined company's enterprise IT division–has software-defined storage and servers. It also contains EMC's VMware with its virtualization, the other major piece of the hyper-convergence puzzle.
While the technology part of the Dell-EMC merger makes sense, the deal itself happened for the wrong reason. It was driven by shareholders and stock prices rather than IT customer demand. EMC's share price was stalled despite its dominance in the storage market, and investors weren't buying CEO Joe Tucci's federation strategy. Meanwhile, Dell chairman and CEO Michael Dell had taken his company private in 2013, giving him the chance to run up a huge pile of debt without worrying about what that would do to his stock price.
Owning EMC will likely lead Dell to take his company public again and dig his way out of that debt. The Dell and EMC merger came at a time when the storage market was undergoing rapid change, however, and gave the world's largest storage vendor a chance to reinvent itself as Dell EMC.
A bit of history
The relationship between EMC and Dell over the years illustrates where the storage and server world has been and where it's going. In 2001, the two companies forged an OEM deal for Dell to rebrand EMC storage. That made sense because both were competing with giants IBM and Hewlett-Packard in the server and storage markets, and they increasingly found that organizations buying servers often bought storage to go with them. When IBM and HP pitched themselves as one-stop shops, server-only Dell and storage-only EMC got pushed aside. So they banded together. Tucci and Dell CEO Kevin Rollins became fast friends, and the relationship worked, for a while.
Things changed soon after Michael Dell stepped back into the CEO role in 2007. He decided that selling storage was such a good idea that he didn't want to split his profits with EMC. So Dell bought its own storage vendors, EqualLogic and Compellent -- after HP outbid Dell for 3PAR storage -- and the EMC OEM deal ended in 2011.
The merger was driven by shareholders and stock prices rather than IT customer demand.
But the EqualLogic and Compellent platforms never added up to a complete storage picture for Dell. And EMC missed having server hardware, even if its ownership of VMware's hypervisors made it a player in the virtual server world. With x86 servers replacing custom-built ASICs as building blocks of storage arrays, customers increasingly built storage roadmaps around server technology. But if EMC developed its own server platform, it could have alienated VMWare's server partners and risked turning them into big fans of VMware competitor Microsoft's Hyper-V hypervisor.
So while Dell storage plodded along with EqualLogic and Compellent, EMC turned to Cisco as its favored server partner. EMC, Cisco and VMware formed VCE in 2009, a joint selling venture that bundled EMC storage with Cisco servers and networking and VMware virtualization. That worked for a while, until VMware's move into software-defined networking threatened Cisco's server business, putting a strain on the EMC-Cisco relationship.
Meanwhile, EMC's investors became restless. Its board first went to HP, which decided to split up rather than expand. Then the board approached Dell and found Dell wanted storage, which meshed with EMC's need for a server partner. So here we are.
Will the Dell and EMC merger work?
Success is far from guaranteed. The storage world is moving faster than ever, and it's tough for an organization as large as Dell EMC to turn fast enough to adapt. The cloud is only gaining in popularity, and neither Dell nor EMC nor VMware has quite mastered it yet. Meanwhile, the lion's share of Dell EMC's storage revenue still comes from legacy SAN, NAS and backup disk platforms. These are areas with little growth and under fire from relative newcomers, such as flash, object storage, software-defined and hyper-convergence.
But Dell EMC has the storage market surrounded. Dell gave EMC the one large piece it was missing -- servers. EMC already had the rest, including all-flash arrays, object storage and virtual data backup. Figuring out the cloud is more of a strategic than technological issue. Dell EMC has the technologies in place, so as traditional SAN and NAS arrays fade, the company will push its emerging technologies -- mostly server-based–to fill the void. For the immediate future, there's hyper-convergence and flash. Dell EMC VxRail -- and other hyper-converged platforms that will follow -- will benefit from having all the main components under one roof and one development team. On the flash side, nonvolatlile memory express and other emerging flash technologies run inside servers as well as storage systems. Dell EMC has both sides covered.
Whatever happens, the next few years will be interesting. Rapid changes in the IT market put Dell and EMC in danger of irrelevance if they had stayed apart. Now Dell positions itself as a one-stop shop for all enterprise IT needs. We'll soon find out if IT shops want what Dell EMC is selling.
Con: Merger raises more questions than answers
It may be hard to imagine now, but in the 1990s, Wall Street investors viewed both Dell Inc. and EMC as disruptive technology companies. Over time, Dell emerged as a household name and the No. 1 maker of personal computers, while EMC blazed a trail in the nascent yet burgeoning market for electronic data storage systems. Dell and EMC are now considered legacy vendors. After closing the record IT deal last year, the merged company had a combined valuation of $74 billion and was spreading its tentacles into computers, data analytics, information security, networking, servers and storage.
Symbiosis is the predicate for a successful merger. Notwithstanding its combined financial and market clout, storage customers are right to wonder: Will Dell Technologies, particularly the Dell EMC enterprise IT division, be a limber or lumbering giant? Is having one supersized vendor better than two separate competitors? While there is an acknowledged upside to the deal, questions remain about whether or not this marriage will be a long, happy one.
Diminishing territory
Dell's traditional PC and server business has flagged for a few years. And like its competitors, EMC has watched networked storage sales steadily decline as companies consume storage as a service to sidestep IT headaches and the multiyear vendor commitments of hosting physical arrays in a data center.
Consequently, with this merger, Dell EMC is deepening its footprint in a gradually diminishing plot of territory: hardware SAN arrays. Converged infrastructure, hyper-converged infrastructure and software-defined storage are the hot tickets. Dell EMC said it will continue selling both VCE converged products that are based on Cisco servers and hyper-converged gear from Nutanix under separate OEM deals. But even those markets face contraction as cost-conscious customers more frequently opt to lease hybrid flash capacity in a multi-tenant cloud data center.
Complications from integration
Even before the merger, EMC execs repeated the mantra: "When it comes to our product portfolio, better to have overlap than have a gap." In that sense, product redundancy created by the Dell and EMC merger may not be an impediment for end users, even if it does create a bit of confusion. Dell EMC has multiple all-flash and hybrid storage arrays that target similar markets. Indeed, in June 2017, the company reported consolidated revenue of $17.8 billion for the first quarter of fiscal year 2018, up 46% from the same period a year earlier.
Will Dell Technologies, particularly the Dell EMC enterprise IT division, be a limber or lumbering giant?
Overlap is especially pronounced in midrange systems, with no fewer than four different flash offerings. EMC's mid-tier storage includes the Unity, VNX and VNXe arrays. In addition to EqualLogic -- now Dell PS Series -- Dell sells the SC Series (formerly Dell Compellent) family of SAN arrays.
Offering customers multiple options is one of Dell EMC's strengths. Even so, it could complicate refresh planning and decision-making for IT shops with limited resources.
Dell SC Series is one of the main historical competitors to EMC VNX and VNXe unified arrays. Dell has indicated plans to consolidate its scale-out PS Series and modular SC Series block arrays, which means EqualLogic adherents should be prepared to migrate to a new storage platform at end of life. Michael Dell has kept his pre-merger word that he would keep Compellent arrays for those customers, but the market will determine how long that platform survives.
One area to watch closely concerns the features included in software upgrades. Most of Dell's software portfolio competes against legacy EMC projects, such as Pivotal Cloud Foundry, RSA and VMware. End of support will be phased in gradually, but it pays to have a contingency plan to migrate data from any applications you're using.
Mergers are hard
Aside from maintaining different product lines, Dell EMC faces the task of integrating two employee cultures. Not as easy as it sounds.
Hailed at the time as a "merger of equals," the $165 billion Time-Warner and AOL transaction in 2000 remains the largest corporate merger in U.S. history. Despite promises of corporate bliss, it ended in a rocky divorce nine years later, when Time Warner spun AOL back out as an independent company. Time Warner-AOL made headlines not just for its price tag, but for the rancor and infighting of top executives and irreconcilable differences between the two different employee cultures. Further hastening the demise was a rapid and largely unforeseen erosion of AOL's market share to upstart high-speed broadband providers.
Those types of cultural and executive differences haven't beset Dell EMC -- at least not yet. Michael Dell is noted for running Dell Technologies with the same lean management style he developed while bootstrapping Dell as a student at the University of Texas. After more than two decades as a publicly traded Fortune 500 company, Dell exited Nasdaq in 2013 in a widely chronicled $25 billion privatization. Going private dovetailed with Dell's cultural roots as a startup and freed up liquidity for it to expand.
Not to be overlooked in all this is the retirement of longtime EMC CEO Joe Tucci, who had postponed retirement several times. Activist investors at EMC had for years pressured Tucci, to no avail, to break up EMC Federation companies as a way to increase shareholder value. The Dell acquisition has kept EMC Federation companies together, but will it be permanent?
Cost-cutting is inevitable in a deal of this magnitude, as illustrated by Dell EMC's reported firing of about 3,000 employees last October. Therein lies part of the cultural dilemma: how to cohesively knit Dell's college-town entrepreneurial roots and EMC's buttoned-down approach as a mainstay of Boston's Route 128 technology corridor.
Barriers to storage startups
When two large vendors compete head to head, startups wedge their way into the market by exploiting innovation gaps. They create breakthrough features that evolve into baseline product specifications, such as data deduplication and integrated backup in the storage market. When this happens, larger vendors pay big bucks for those companies, giving investors incentive to back new startups. So while Dell EMC will continue to explore strategic acquisitions -- that's how Compellent and EqualLogic became part of Dell and how Isilon and Data Domain products got absorbed into the EMC brand -- it's unlikely to spend as much on acquisitions as the two companies spent independently. That means if you have a vision to launch a storage company that will be "the next big thing," your route to market just got a little tougher.
How sustainable is the merger debt?
Dell acquired EMC using a complicated leveraging scheme that spread $57 billion of debt across a number of investment vehicles. For instance, creditors allowed Dell EMC to turn VMware, the virtualization giant spawned by EMC, into a tracking stock to be used as collateral. That move let the vendors woo a broader range of investors. So far, the company said it has paid down about $7 billion of the debt.
Challenges loom on the horizon, however, in the form of faster-than-expected cost increases for componentry and flash memory chips. Dell has had to absorb the difference between its price quotes to customers and the market costs. That's a market anomaly beyond its control, but it further underscores the difficulties in trying to sell traditional gear in a hybrid IT world.
To pay down the debt, Dell EMC will have to accept a declining market share for computer gear while significantly juicing up revenue from sales of IT services and software. How successful it is in doing that could play a large role in determining whether the Dell and EMC merger will be viewed as a boon or bust over the long term.
