Dell's EMC Acquisition: Perils, Opportunities Abound
Dell's planned acquisition of cloud computing and storage company EMC for $67 billion is the largest technology industry acquisition to date. But the deal is significant beyond its monetary value. It underscores the turmoil among traditional IT vendors as enterprise computing moves from hardware and software products to subscription-based cloud services.
The combined company will be privately held, freeing it from the regulatory scrutiny and earnings pressure faced by public companies. VMware, mostly owned by EMC, will remain a separate publicly traded company.
On a conference call for the media, Joe Tucci, CEO of EMC, acknowledged that the IT industry is going through a transformation, and the traditional IT business is being disrupted. Yet, he stressed there are opportunities for the combined companies, pointing to the growing amount of business telemetry -- the product of industrial sensors, devices, and apps -- that requires storage, processing, and analysis.
"This combination makes great sense because of the obvious ways that our businesses complement each other and allow us to grow," said Michael Dell, CEO of Dell, who will oversee the combined company.
(Image: Dell)
The union of Dell and EMC could pose a problem for HP, because it magnifies a competitor and leaves CEO Meg Whitman with one less potential buyer for HP assets. In a memo to employees, Whitman characterized the deal as a validation of HP's approach, even as she suggested debt, management obstacles, and customer confusion will hinder the integration of Dell and EMC.
Glenn O'Donnell, VP and research director at Forrester Research, said in a phone interview that the deal could work, because the two companies fit together well. Yet he foresees challenges.
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"The legacy vendors are under threat, and some are going to disappear," said O'Donnell. "If they stick with the same business model, they're going to be in trouble, regardless of how they work this out with EMC."
Computer sales have been declining for several years, and demand for enterprise storage, particularly from EMC, has been soft.
"These are two companies that have been somewhat declining in their core business," said O'Donnell. "Does it make sense to put one plus one together and get less than two?"
O'Donnell said whether the deal ultimately ends up working will depend on its execution. "They're probably going to lose some money for a while."
But as a privately held firm, Dell-EMC will be able to realign its operations without a backlash from investors. To rebuild, O'Donnell explained, the company will have to retrench, make expensive investments, and see earnings suffer for several quarters. "If you did that as a public company, Wall Street would crucify you."
Michael Dell sees an advantage in offering a full array of IT products and services to business customers, rather than products that need to be connected to other vendors' systems. "Customers actually don't want to integrate things themselves," he said, pointing to software-defined data centers and services related to mobility, security, and cloud infrastructure as areas of potential growth.
O'Donnell echoed that view. "That integrated offering is more important than it has ever been," he said. "EMC can no longer be just a storage company."