Deal Analysis: In massive play for storage and more, Dell bets $63.1bn on EMC to reshape IT landscape

Analysts: Brenon Daly, Simon Robinson, John Abbott, Christian Renaud, Scott Crawford, William Fellows, Alan Pelz-Sharpe, Katy Ring, Matt Aslett, Chris Hazelton

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, Dell-EMC would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell's bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell's relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of 'piece parts' and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

The 451 Take

Though Dell has been on a path to build a 'better together' story for almost a decade, it clearly hasn't been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting 'big picture' has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it's easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry's most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

Deal details

Dell will cover its massive $63.1bn acquisition of EMC with about three-quarters of the consideration in cash and the remaining quarter through a tracking stock in VMware. (The structure didn't sit well with current VMware shareholders, who knocked the stock down 8% to its lowest level in more than two years.) Under terms, EMC shareholders will receive $24.05 for each share they own, plus a variable allocation of VMware tracking stock. The deal is expected to close within a year.

Having already borrowed heavily in its leveraged buyout (LBO), Dell will once again be tapping the credit market to pay for EMC. In fact, it'll be hitting up lenders even harder. Dell borrowed roughly half of the $25bn it needed to end its 25-year run as a public company in February 2013. Reports indicate that Dell might borrow as much as $50bn in connection with its EMC buy. (For its part, EMC has about as much cash on hand as its total debt load.) As might be imagined with that much debt to be placed, Dell is relying on eight separate banks for financing and (to varying degrees) advisory. On the other side, EMC tapped Morgan Stanley and Needham & Company for advice and Evercore Partners for a fairness opinion.

Deal valuation

Though EMC's valuation is about a turn lower than typical blockbuster consolidations, it nonetheless stands out when compared with how low Dell valued itself in its LBO. (Critics contend that LBOs led by management, such as Dell's, are irrevocably conflicted because management, which supposedly serves shareholders, wants to pay as little as possible for the business in the acquisition rather than necessarily trying to get as high of a price as possible.)

According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell's LBO, which stands as the third-largest private equity (PE) tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

In terms of the broader M&A market, we should also note that Dell's reach for EMC pushes 2015 into record territory for overall spending on deals. According to The 451 M&A KnowledgeBase, acquirers around the globe have now spent $475bn on tech, media and telecom (TMT) transactions so far this year. That tops the previous full-year record for global TMT M&A spending of $420bn from 2007. Overall, this year has seen two of the three largest TMT deals recorded in the KnowledgeBase over the past 15 years. (In addition to Dell's $63.1bn planned pickup of EMC, this year also featured Charter Communications' $56.7bn purchase of Time Warner Cable.)

Storage market impact

The reverberations of this transaction will be felt most keenly in the storage segment, which must be considered one of the primary motivators of the acquisition. Quite simply, EMC dominates the external storage systems market, and has done so for almost two decades. It has share leadership in the large and mature SAN sector – both at the high end and in the midrange – and, through a highly successful M&A strategy, has repeatedly managed to stay in front of all significant emerging and fast-growing segments, be that de-duplication and backup (Data Domain), scale-out NAS (Isilon) and, currently, all-flash arrays (XtremIO.)

Though the enterprise storage space is experiencing some secular shifts that are prompting questions about its future, no other player has managed to remove EMC's vice-like grip on this market. That also includes Dell, which has spent more than $2.5bn on M&A alone in an attempt to wrest share from EMC. Additionally, in a rather remarkable performance by a company that doesn't enjoy a server franchise, EMC has also managed to establish leadership in the converged infrastructure segment with the VCE coalition that now resides inside EMC.

Looking at the relative portfolios of the two companies, there is clear and substantial overlap in the storage systems sector, especially in the lower and midrange. Dell's EqualLogic- and Compellent-derived systems clash with EMC's VNX franchise, which – though huge – is an older architecture and has been declining. (This market is about share, rather than growth). We'd expect EMC's other storage products to take the lead in areas such as flash systems, scale-out NAS and high-end storage, where Dell has no market share at all and EMC's VMAX systems dominate (though this is another declining segment).

The high end is an example of where EMC brings substantial large enterprise credibility to Dell. Meanwhile, Dell's server franchise offers a home for EMC's nascent but highly regarded software-defined product, ScaleIO. This software can also run in a hyperconverged infrastructure configuration, which is another positive for Dell's server business. While this is still a nascent market, the opportunity here could be significant as combined server/storage offerings begin to replace traditional separate server and storage silos.

The competitive impact of this deal across the infrastructure will be significant. Dell's move contrasts with both IBM – which sold its x86 server business – and HP, which is splitting up to get more focused. While the combined entity will have substantial share in both industry-standard servers and storage, it will still be relatively weak in traditional networking. That said, Dell's ownership of VMware gives it a huge leg up in SDN. There will be knock-on effects in terms of EMC's relationship with former strategic partner Cisco, which has already cooled off significantly. Cisco may now have little alternative but to make a more strategic move into the storage arena. NetApp would be the most obvious target, especially as it looks even more isolated being the sole remaining stand-alone storage player of any scale. There is a potential impact on the nascent Dell-Nutanix relationship, which will raise questions about where VMware's VSAN fits into the picture.

Systems market impact

The importance of enterprise servers to this transaction is apparent from the fact that, while Dell's headquarters will remain in Texas, the combined enterprise systems business, including servers and storage, will be based in Hopkinton, Massachusetts. This will result in a business with about $30bn in annual revenue. Of all of the pressures EMC has faced in recent years, the need to fill the server hole has been one of the strongest, particularly as converged infrastructure sales at large enterprise customers took off. As far back as 1999, EMC bought server maker Data General, but quickly discontinued its server product lines. In 2012, it struck a somewhat vague x86 server development agreement with Lenovo. Far more significant was EMC bringing convergence specialist VCE into the Federation in October 2014, which enabled VCE to offer technology components beyond those of its three founding shareholders – VMware, Cisco and EMC – for the first time. Earlier this, year VCE launched VxRack, a hyperconverged offering using EMC's ScaleIO software, Cisco networking switches and servers from original design manufacturer Quanta.

As part of the Federation, VCE became the focus of EMC's plans to bring its converged infrastructure assets together – assets such as the ScaleIO and ViPR software-defined storage layers as well as high-performance storage options like Isilon and ExtremIO. It could equally play the same role with Dell servers. On the investor call, both Michael Dell and Joe Tucci endorsed VCE and noted that the partnership with Cisco would be continued.

Dell itself has made some progress moving up into the enterprise segment with its server products in recent years. As early as 2007, the company gained some traction in hyperscale datacenters with its Data Center Services division. Then a series of acquisitions (EqualLogic for modular storage, Scalent for infrastructure management and Force10 for networking switches) seemed to bode well for its converged management offerings. However, Dell struggled to bring fully converged systems to market. Today it fields VRTX appliances, FX modular servers and its M1000e blade servers as the basis for converged products. EMC's enterprise credentials could broaden the reach of these systems to the high end and push them into the software-defined datacenter, hybrid cloud and converged infrastructure opportunities that the combined entity is determined to pursue.

As for virtualization, it looks very much as if VMware will be left alone to continue on its independent path. The collaboration-competition model will continue and Dell has confirmed that it won't be using VMware as its exclusive virtualization provider, while acknowledging that there will be plenty of opportunities to continue working with the VMware ecosystem. VMware should also benefit from 'significant synergies' with Dell's go-to-market channels.

Networking market impact

Dell's decision to keep VMware as an independent, publicly traded company has far-reaching ramifications in networking as well. VMware NSX represents one of two dominant camps in modern datacenter networking (the other being Cisco ACI), and the vendor is a close partner of all of the tier two networking providers, including Dell, HP, Brocade, Juniper Networks, Extreme Networks and Arista. These players have sought tight product integration with VMware, even to the extent of allowing VMware NSX to remotely control their hardware switches as an alternative to Cisco's hegemony. Dell's ownership position in VMware competitively exposes these vendors and helps indirectly fund their competitor – however, the pragmatic play for all of them will be 'business as usual' until a viable third alternative emerges.

Incumbent Cisco's response to Dell's move will likely be deafening silence, as Dell Networking is a rival, but not a large enough one to merit a strategy shift. ACI shipments are currently outpacing NSX deployments at nearly 2:1, but the networking titan is under considerable pressure from customers to integrate its technology closely with VMware. Dell trails HP as a competitive threat in shipping networking switches to Cisco, both of which are also seeing the rapid rise of Arista (another close VMware collaborator) on their flanks. The result in networking will be far more impactful when viewed via the ownership structure of VMware than any renewed vigor or product direction of Dell Networking.

Security market impact

EMC's RSA security division brings a diverse portfolio in identity and access management, data security, fraud defense and a range of encryption capabilities. In security management, the RSA Security Analytics portfolio leverages the acquired NetWitness and RSA's expertise in security operations, while Archer remains a dominant force in GRC. Dell, meanwhile, not only complements RSA Identity with the Dell One portfolio (from the 2012 Quest Software buy), but also offers network security for both SMBs and enterprises with SonicWALL, endpoint security with KACE and the Dell Data Protection | Endpoint Security Suite, and security capabilities for both native and third-party cloud services. In SecureWorks, Dell has one of the most competitive managed security service providers in the business to capitalize on growing opportunities to fill a persistent security talent shortage.

However, other incumbents might not be Dell-EMC's most serious threat. Dell is the darling of SMBs, while RSA focuses on large enterprises and has a product strategy tilted to support storage sales. The combined company's success will depend heavily on its ability to shift the security focus to a software-defined networking model – an area where VMware can provide leadership and guidance – but the combined Dell-EMC brings a lot of legacy to the fight and will face challenges regardless from the cloud revolution, as well as from newer players seeking to respond to heightened enterprise demand for security that really works.

Cloud market impact

The principal cloud assets that Dell is obtaining include VMware's vCloud Air public cloud service; VMware's vRealize portfolio of cloud automation and management tools; EMC's Virtustream; EMC's Federation Enterprise Hybrid Cloud Solution, aka private/hybrid cloud (VCE) offerings; and EMC's Mozy cloud-based storage offering. Of these, Virtustream is the standout. EMC bought the startup earlier this year for $1.2bn, slotting it into its managed cloud service business. What's key is that Virtustream is offering precisely the kind of managed services, especially for moving and managing SAP deployments into the cloud, that we believe will account for the majority of the future opportunity for infrastructure services. Up to 70% of the revenue in this business will be in the supply of managed services on top of infrastructure.

Dell operates the Dell Cloud Manager portfolio of cloud automation and management tools, which overlaps significantly with VMware's vRealize. It provides a 'best execution environment' for matching workloads to suitable resources and is connected to most of the major cloud services. Apart from that, there's not much overlap. VMware's vCloud Air is not yet a real contender in the market or a threat to AWS, Microsoft or Google. It's touted as the way for VMware to usher its massive installed base of on-premises users to the cloud, but so far there has been little evidence of wholesale migration (except perhaps into AWS). Dell has a substantial investment in the Microsoft Azure-based Cloud Platform System, which is carried to market by the likes of Capgemini (as SkySight).

With this acquisition, Dell has propelled itself into the business of being a cloud service provider – a game it decided a couple of years ago that it did not want to play, instead assuming the role of an arms provider to cloud suppliers. The company has clearly changed its mind and now believes this is the way for it to remain relevant and help it execute a complete transformation from hardware producer to IT provider.

Big-data market impact

While much of the news of the Dell-EMC pairing has concentrated on infrastructure and cloud, big data is likely to be another focus for the combined company given that it represents a key potential area for growth and innovation as well as an opportunity to augment the respective server and storage portfolios with data platform, data management and analytic products and services.

Dell already owns a number of data-related assets, including Statistica for predictive analytics (thanks to its purchases of Kitenga and StatSoft); master data management and data integration (via its Boomi buy); as well as data preparation and database development and management (with its Quest pickup). EMC, meanwhile, combined its data-related assets with VMware's database and cloud wares in forming Pivotal, which generated sales of more than $100m in 2014 from its Pivotal Big Data Suite (including the Greenplum analytic database, HDB SQL-on-Hadoop engine, GemFire in-memory database and Pivotal HD distribution of Hadoop).

There's little if any overlap in Dell and EMC's data-related assets – indeed, Dell's predictive analytics, data management and data tools would potentially complement Pivotal's open source data platform strategy. However, the combined entity would need to scale up sales and marketing around Dell's assets to compete in the increasingly competitive advanced analytics and data-integration arena, where it would be going head to head with incumbents such as Microsoft, IBM, Oracle and SAP, as well as many more innovative startups. EMC has previously shown its willingness to put the weight of its sales and marketing behind Pivotal's assets with the EMC Federation Business Data Lake, though the continuation of that strategy will depend on whether the EMC Federation survives intact.

Mobility market impact

Dell's reach for EMC will have a broad impact across enterprise computing, including end-user computing. While EMC does not play in the end-user computing space, its subsidiary VMware does in a big way. There is significant overlap between Dell and VMware for end-user computing – e.g., desktop virtualization, mobility and endpoint management – which will be a key driver for maintaining VMware as a separate entity for some time. There is an opportunity for Dell to pick and choose the best options or several options that it can resell.

This deal also raises some uncertainty regarding the future of Dell's own enterprise mobility business, which was built on top of previously acquired KACE and Wyse. Dell will likely slowly deemphasize sales of Dell Enterprise Mobility Management (EMM) in favor of VMware's AirWatch. Sales teams will place emphasis on what is popular with customers, and AirWatch has built significant market share, both before and after its sale to VMware. The reselling of AirWatch by Dell could mean a substantial growth opportunity in the SMB space. This means that as Dell's sales reps push AirWatch, its own EMM offerings will suffer. For AirWatch, Dell's security for mobility will fit in well. AirWatch has put together its Mobile Security Alliance, which does not include Dell Data Protection and SonicWALL, but they will very likely join soon.

Content management market impact

EMC's Enterprise Content Division (ECD) represents the amalgamation of a number of M&A moves over the years related to information and document management, most notably the 2003 purchase of Documentum and the 2005 pickup of Captiva. To date, this group has run fairly independently of the EMC core and remains based in Documentum's home base of Pleasanton, California. Over the past few years, revenue for the unit has been flat. As a result, it is unsurprisingly one of the least-loved parts of EMC's business, though it does generate a fair amount of cash.

Despite some collaborative initiatives with fellow EMC groups Pivotal and VMware, nothing has really delivered growth or lifted ECD's visibility or status. However, the reason for its lackluster performance has more to do with it being a poor fit for the storage giant. The software that this division produces aims to reduce data and content volumes via effective management, which is directly at odds with a firm that needs to sell ever more data storage. Unsurprisingly, the core EMC sales force has never truly gotten behind this division and its products. Just as the unit was a poor fit within core EMC, we see no reason to imagine that it will be any more likely to find a comfortable home within Dell, and it could – and arguably should – be divested, assuming that it fetches a fair price from an interested buyer such as a PE shop or larger software player like SAP.

In fact, in 2013 EMC did try to sell the division (then known as IIG) but failed to find a suitor at the price it was asking. We believe ECD has good technology, a solid team and very strong brand recognition in the name Documentum. Running independently and unencumbered by its parent, it should return to growth and success. The fact that this group has remained an outlier under the EMC umbrella means it will be easy to part ways with should the new ownership structure choose to do so.

Services market impact

Dell separated its Support & Deployment Services from the rest of Dell Services more than a year ago, so in terms of services resources and revenue, the acquisition of EMC's global services arm (revenue of $6.5bn in FY 2014) will have the most material impact for the Dell Enterprise Solutions unit, where Support & Deployment Services now resides, rather than for the Dell Services business. Within Dell Services itself, the addition of EMC will bring additional capabilities to the Infrastructure and Cloud Computing line, creating a larger enterprise footprint for Dell's storage and hybrid cloud capabilities, as well as further opportunities in providing managed IaaS for service providers. One less immediately obvious impact that the combination will have is to enhance the credibility of Dell Services in the burgeoning big-data services market, where the new entity will have a strong reach into the data lake service opportunity around data gravity, as well as the ability to leverage EMC's ECD, which was built around Documentum.


Dell's financially risky bid for EMC is all about the potential to provide customers with a genuine alternative to the public cloud – one rooted in simplicity. IT buyers want to work with fewer strategic suppliers, unburdened by the need to pay a lot of attention to the specifics of infrastructure. All buyers want is for IT to work together to help them meet their business objectives. In theory, at least, Dell and EMC possess just about everything IT buyers need – from the hypervisor to the spinning disk – to accomplish this.

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