So let’s take a look at the press release (it can be found here) in our customary News Analysis style, and then let’s look at the implications:
Dell Inc. and EMC Corporation today announced they have signed a definitive agreement under which Dell, together with its owners, Michael S. Dell, founder, chairman and chief executive officer of Dell, MSD Partners and Silver Lake, the global leader in technology investing, will acquire EMC Corporation, while maintaining VMware as a publicly-traded company.MyPOV – So we know who acquires who, MSD is the investment vehicle of Michael Dell and Silver Lake the partner that Dell used to take itself private. Keeping VMware (see latest blog on VMware, the VMworld event report here) as a separate company is key as we will see later. No word of other EMC federation members though, Pivotal (latest blog post here), RSA, VCE and Virtustream (the newest member of the EMC federation (see the Market Move blog on the acquisition by EMC here).
Under the terms of the agreement, EMC shareholders will receive $24.05 per share in cash in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. Based on the estimated number of EMC shares outstanding at the close of the transaction, EMC shareholders are expected to receive approximately 0.111 shares of new tracking stock for each EMC share. Assuming, for illustrative purposes, a valuation for each share of tracking stock of $81.78, the intraday volume-weighted average price for VMware on Wednesday, October 7, 2015, EMC shareholders would receive a total combined consideration of $33.15 per EMC share and the total transaction would be valued at approximately $67 billion. The value of the tracking stock may vary from the market price of VMware given the different characteristics and rights of the two stocks.MyPOV – An interesting vehicle to finance the deal, with VMware tracking stock. We leave it to our colleagues the financial analysts to look more in detail, but it is clear that the VMware stock prices is going to be in the spotlight in the next months. Interesting the announcement is featured on all other EMC federation members’ homepages, but not VMware’s.
The EMC Board of Directors approved the merger agreement and intends to recommend that stockholders of EMC approve the agreement.MyPOV – Important detail…
DELIVERING FUTURE-READY TECHNOLOGIES TO CUSTOMERSMyPOV – Good point the largest privately controlled technology company. It will be interesting to see if and how Dell can use being private as its advantage. It has certainly show it here, as Dell, the smaller of the two vendors, can acquire EMC, the other way around would probably not have worked. And it is correct – both vendors combine a sizeable part of IT spend, for some customers we estimate north of 50%, for others in the low percentages (e.g. a VMware only customer). But it gives Dell what Dell wanted (and needed) – more access to the CIO office, and a larger portfolio to sell. Once you have that trusted relationship, you can use it to sell more and gain more share of wallet.
The combination of Dell and EMC will create the world’s largest privately-controlled, integrated technology company. The company will be a leader in the extremely attractive high-growth areas of the $2 trillion information technology market with complementary product portfolios, sales teams and R&D investment strategies. The transaction combines two of the world’s greatest technology franchises with leadership positions in servers, storage, virtualization and PCs and it brings together strong capabilities in the fastest growing areas of the industry, including digital transformation, software-defined data center, hybrid cloud, converged infrastructure, mobile and security.
Since becoming a private company, Dell has had the flexibility and agility to focus completely on customers and invest for long-term results. The transaction will unite Dell’s strength with small business and mid-market customers with EMC’s strength with large enterprises to fuel profitable growth and generate significant cash flows. The combined company will consist of strategically-aligned businesses and incubated high-growth assets, fostering innovation, enabling customer choice and attracting and retaining world-class talent .MyPOV – And here we have it stated – more CIO office access at larger corporations. True also that there are ‘incubated high growth assets’ (an interesting term) across both vendors, but both still have to show and live up to their growth potential. It is even harder to see that on the Dell side, but never vendor has created a 1B+ software product on the incubator side. Dell will needs a few of those to pull off in the future.
“The combination of Dell and EMC creates an enterprise solutions powerhouse bringing our customers industry leading innovation across their entire technology environment. Our new company will be exceptionally well-positioned for growth in the most strategic areas of next generation IT including digital transformation, software-defined data center, converged infrastructure, hybrid cloud, mobile and security,” said Mr. Dell. “Our investments in R&D and innovation along with our privately-controlled structure will give us unmatched scale, strength and flexibility, deepening our relationships with customers of all sizes. I am incredibly excited to partner with the EMC, VMware, Pivotal, VCE, RSA and Virtustream teams and am personally committed to the success of our new company, our customers and partners.”MyPOV – Good quote from Dell, on the strategic areas he enumerates, we can follow on software defined data center, converged infrastructure (if e.g. Evo comes to Dell servers with force), mobile (Airwatch) and Security (RSA). We are more skeptical on digital transformation and hybrid cloud. On the former, because that involves also SaaS assets, that the combined entity will not have, and the latter as it requires to play in the public cloud, something that neither Dell nor EMC have done so far. Interesting Dell does not call out the EMC ‘bread and butter’ business… storage. Whatever that means for the storage plans we will see. If asked I am sure Dell will see storage as part of the software defined data center, where we are e.g. optimistic around the VMware Nicira assets.
“I’m tremendously proud of everything we’ve built at EMC – from humble beginnings as a Boston-based startup to a global, world-class technology company with an unyielding dedication to our customers,” said Joe Tucci, chairman and chief executive officer of EMC. “But the waves of change we now see in our industry are unprecedented and, to navigate this change, we must create a new company for a new era. I truly believe that the combination of EMC and Dell will prove to be a winning combination for our customers, employees, partners and shareholders.”MyPOV – An almost sentimental statement by Tucci, which also shows why EMC has not been able to pull it off so far in regards of strategic growth areas (which largely still remains a mystery to me – we will have to wait for the Tucci biography for a shot at this).
"We are excited and honored to invest in the outstanding businesses built by Joe Tucci and his world-class management team. This is an extraordinary opportunity to continue and expand our partnership with the iconic technology entrepreneur Michael Dell and his talented team,” said Egon Durban, managing partner of Silver Lake. “We believe the strategic integration of EMC and Dell will generate unparalleled depth and breadth across servers, storage, virtualization and the next era of converged infrastructure, creating a global technology platform poised for sustained long term growth and innovation in the years to come. We are doubling down and increasing our investment in this differentiated market leader for the next paradigm of enterprise computing.”MyPOV Good quote from Durban, who (finally!) mentions storage, and the other parts of the data center play, servers and virtualization (but misses networking). And yes – Silver Lake is doubling down and betting on Dell to pull this off, ‘only’ the largest tech deal so far. In comparison, the tally for serial acquirer Oracle is around 50B over the last 10+ years.
VMware will remain a publicly-traded company and continue to provide customers’ value through leading software- defined data center technology, together with its cloud, mobile and desktop offerings. This transaction is expected to accelerate VMware’s growth across all of its businesses through significant synergies with Dell’s solutions and go-to-market channels. VMware remains committed to investing in and partnering with its strong, industry ecosystem.MyPOV – And a key point on the independence of VMware again. Fair enough to say the independence of VMware allows for more freedom in partnering, but Dell competitors who are now VMware partners will not forget who owns VMware now… we will have to see if these may mean a move away from VMware in the medium run.
TRANSACTION TERMS
The transaction is expected to be financed through a combination of new common equity from Michael S. Dell, MSD Partners, Silver Lake and Temasek, the issuance of tracking stock, as well as new debt financing and cash on hand. There are no financing conditions to the closing of the transaction.
Mr. Dell and related stockholders will own approximately 70 percent of the company’s common equity, excluding the tracking stock, similar to their pre-transaction ownership.
MyPOV – No comments, here interesting that Singapore based Temasek got an in on the deal.
Following completion of the transaction, Mr. Dell will lead the combined company as chairman and chief executive officer. Mr. Tucci will continue as chairman and chief executive officer of EMC until the transaction closes. Dell’s headquarters will remain in Round Rock, Texas, and the headquarters of the combined enterprise systems business will be located in Hopkinton, Mass. […]MyPOV – And that settles the leadership question, as well as when Tucci will resign. Interesting to see the common headquarter will be in Massachusetts, not the cheaper location to do business, but probably important to keep consistency. There seems to be a sentiment in Massachusetts on losing businesses and on the Q&A call it was clear that both Dell and Tucci were ready to address this concern.
Implications, Implications
Implications for Customers
As usual when acquisition happen, we recommend customers to make sure that key roadmap items are secured. Combined entities look for synergies, and those synergies may not be aligned with what enterprises have been promised before, or at least made their buying decisions on. Contracts are the weapon of choice to protect IT projects and enterprises from undesired outcomes. In more detail, storage customers should stay the course, unlikely they will see major disruption, but question converged appliances coming from EMC. It is likely that the next generation of appliances coming from the new Dell will be significantly better in price for performance. The VMware portfolio is unlikely to be affected, so stay the course. If building a next generation application projects, Pivotal is unlikely to be affected in the near term, too. Customers should not expect radical new and / or soon solutions to operate the public side of a hybrid cloud solution of the new Dell – as much as we would recommend the vendors to do so. So public cloud projects beyond the current EMC / VMware / Dell reach should stay the course, as project economics are unlikely to change substantially.Implications for Dell
Rumors are out there that Dell tried to get rid of the consumer PC business before, if true it points to the fist challenge of a combined entity that is struggling to keep up growth on the consumer side. In the same industry HP is just separating B2C and B2B, one development to watch. If Dell can part from its onetime secret to success (cheap PCs), it will be an interesting step to observe. Dell has been able to grow its B2B server business to (estimated) 8B+, a respectable size, but not enough to reach the scale it needs. On the flipside, the Dell Server business is larger than the EMC Federation (excluding EMC) combined. Dell has also been working on a number of software assets, some of them acquired, some of them grown in-house, one of the more prominent ones the integration product formerly known as Boomi. One key area to watch will be, if Dell will embrace the latest VMware appliance, EVO. And the new Python offerings maybe interesting for a new way of running microservices and data centers. I expect the storage offerings to be merged quickly, for whoever remembers the bidding war between HP and Dell a few years ago around 3Par – this is an ironic step today. If the ‘new’ Dell will manage to integrate the technology stack it will be offering more products and services than arch rival HP and IBM, both are weaker in either functionality and or volume of the dimensions of the software defined data center game. From a breadth and depth only Oracle will be ahead of Dell, though clearly trailing on storage. Microsoft just launched its first PC, but we see the PC business as a side note in the overall considerations for the new Dell.Implications for EMC
It will be interesting to see how long the EMC brand will keep being put on new products. Likely EMC is going into computing history as the ‘one trick pony’ that never made to make it beyond storage to be truly great. We expect the storage product to become part of Dell server combinations soon, everything else is not substantial to worry too long at this point.Implications for EMC Federation companies
So let’s walk through them….VMware remains the crown jewel in two aspects: For one to finance the deal – with immediate pressure on Gelsinger and team to keep the stock price up. And then for the intimate knowledge of knowing what enterprises run inside their data centers. When I asked Gelsinger why VMware is not doing more to monetize this, his reply was that VMware already is, to which mine was that we need to see more of that then. It will be that more that will make or break much of the success of the new Dell. If Dell can give VMware a homogenous on ramp to Dell owned datacenters, fortified with competitive SLAs, this will be an option CIOs and CTOs will look at with no doubt for the existing loads. If there are savings, why not run even complex load like e.g. SAP and Oracle solutions in the public cloud? As VMware is under pressure to keep up revenue we don’t expect any lower interest on the EUC portfolio. Invigorated by Windows 10, Airwatch and Horizon just have found a few thousand sales people with good CIO access. Monetizing this will be key for the success of the new Dell.
Pivotal remains a mixed story – shining on the PaaS side with CloudFoundry, not convincing on the database side. But even the latter may find new life when combined with the Dell ‘incubated’ products on the Big Data side. Though we remain skeptical, a struggling product family doesn’t get better when combined with a new incubated product family that isn’t fully developed. The story is very different on the PaaS side, where CloudFoundry remains almost the de facto standard for large enterprise PaaS projects. To give these next gen applications being built on CloudFoundry a public cloud home made by Dell is going to be key (instead of losing it largely to AWS and others). That this alignment of PaaS and IaaS works is something we see all over the market, from Oracle and IBM all the way even to Rackspace. Enterprises want to see less crack points and who can give them less integration headache will be a winner for tomorrow’s budgets.
Virtuestream is a short term opportunity – having done well with hosting / putting to the ‘cloud’ complex SAP ERP solutions. That is unique know how that should help the new Dell very well. In the long run though SAP will be better at hosting / putting to the cloud SAP than anyone else, so it is important for Dell to move fast in this regards, and again needs a target / public cloud where to run these loads.
RSA and VCE are beyond my coverage, so won’t mention them here.
Implications for partners
A great day for combined partners, which will get a lot of attention to power the new Dell. Watch for the portfolio cleanup and bet on the right horse early. As these things go, in case of doubt bet on the Dell product. Single vendor partners need to re-think their strategy if they want to try to be all in – but that will be a crowded boat, or if they want to seize the opportunity for a more heterogeneous portfolio. Some great partner enterprises have risen from the ashes of similar difficult scenarios.Implications for competitors
We expect the competition to try to throw as much FUD against the new Dell as they can possibly create. All these markets are cut throat, Dell knows that. We expect competitors to offer migration offerings, with storage being the largest, and possibly even the most vulnerable target. Enterprises will keep looking for cheaper alternatives from open source vs e.g. VMware. But competitors should not bank on the uncertainty to last longer than two, maybe three quarters. Pressure on Dell to execute is massive, and that will lead to a clear roadmap and execution sooner than later.Overall MyPOV
A very bold move by Dell, that is not even sure to go down as announced, pending financing and VMware stock value. Business goes on, e.g. VMworld Europe kicks off Tuesday this week and it will be a key event to reassure European customers of what VMware can do. Maybe Michael Dell will jet over there, which probably would be a key endorsement move and could slow some potential ‘Euro frenzy’. The industry has not done well with mega mergers, think of the HP / Compaq merger, but these are key events that are even being reviewed in the press 10+ years later. It will be the same for the Dell / EMC merger that – if Michael Dell and his (new) team can pull it off – will be a remarkable re-invention of the Dell brand, a very different Dell. It will be key to see if Dell can muster the investment to build out a Dell ‘public’ cloud for all the arguments we have listed earlier, that’s where in my view EMC missed the boat. And being later has never helped in the high tech business, but to catch up is getting harder and harder, so speed and execution will be of the essence. We will be watching.
