After weeks of speculation, Dell and EMC made history on Monday with the announcement of a $67 billion merger deal—the largest in tech history—which will see EMC go private under Dell's ownership. While a transaction of this size and scope will justifiably be scrutinized in depth over the coming weeks, here are some initial takeways for customers to consider.
It's All About VMWare
EMC owns an 81 percent stake in VMWare, which will remain a publicly-traded company after the deal closes. That said, VMWare and the enterprise workloads it runs in companies around the world are the "crown jewels" of the merger, says Constellation Research VP and principal analyst Holger Mueller.
Dell's aim is to transfer those loads to private and public data centers stuffed with Dell servers and software, along with EMC storage, VMWare Airwatch and other assets of the combined company.
"We know much of the future loads will run in the public cloud, so the new Dell has to find a way beyond being an OEM provider for the public clouds as put up by Telcos and others," Mueller adds. "No one knows better what loads enterprises run on-premises than VMware. When to move and transfer this load beyond on-premises data centers is the master plan."
A Pivotal Move
Dell CEO Michael Dell and EMC CEO Joe Tucci didn't talk much about software on Monday's conference calls for the deal. But software, specifically enterprise application development and delivery, could end up being a major growth engine for the combined company. "If executed right, Dell owns the majority of Pivotal, the most popular enterprise PaaS, and has a seat at the table for next-generation applications," Mueller says.
Open for Business?
Dell intends to continue partnerships such as VCE, the converged infrastructure venture between EMC, VMware and Cisco, and customers will have a wide set of choices," according to executives. Nor will Dell push VMWare exclusively as a virtualization platform, according to Michael Dell. Expect continuations of EMC's strong partnerships with the likes of Lenovo and Hewlett-Packard as well, executives said.
Paying for the Deal
Dell, along with Silver Lake Partners and MSD Partners, is taking on massive bank debt to acquire EMC. The plan is to significantly deleverage that debt over the next 18 to 24 months, in part due to "cost synergies," according to Silver Lake managing partner Egon Durban. While layoffs are expected, executives provided no specifics on Monday.
Another way Dell could generate capital to pay down the debt would be through divestures of EMC product lines, with the VMware stake clearly being the most lucrative option.
The Bottom Line
All of the sentiments and expectations about strategic synergies aside, this is a mega-merger that carries massive risk and uncertainty - as with any deal of such size. Dell and EMC customers should prepare for a long, complex integration process, as well as the potential for significant changes in their sales and support relationships with both companies.
Customers at the beginning or middle stages of their public and private cloud journey will also be presented with a major new choice for a strategic provider.
“Dell has a lot of free cash flow from the deal and has a once-in-a-life time opportunity to restructure its portfolio to compete not only in private cloud, but gain scale to compete with Amazon for cloud IaaS and PaaS," says Constellation Research founder Ray Wang.
For additional analysis, check out Mueller and Wang's Google Hangout discussion on the deal below.
