EMC: This Is Not The End!

“Now this is not the end. It is not even the beginning of the end.

But it is, perhaps, the end of the beginning.” Winston Churchill

Next week the world’s largest storage vendor will hold the last EMC World Conference as a separate entity. It remains to be seen if the company, which will shortly be joined with , will flourish under its new owners (i.e. 83% of mergers have been unsuccessful in producing any business benefit as regards shareholder value), but succeed or fail, the mega-, now valued at $60 billion, $7 billion less than it originally was worth, will shake up the IT industry, and the conference will presumably provide more information about how the pending deal, which is expected to close no later than October, is progressing.

The top two enterprise vendors — IBM (worst revenue in 14 years) and HP (split into enterprise and commodity businesses) — have been struggling to redefine themselves through a strategy of addition through substraction, dumping technologies and business units. Dell has chosen to expand its portfolio, and while it too is shedding assets, it will reinforce its position as the only soup-to-nuts IT vendor once the closes.

With both the U.S. Federal Trade Commission and the European Union regulators reportedly on board, the two biggest remaining hurdles are the financing and EMC shareholder approval. Shareholders are expected to approve the sale in June, and financing — $50 billion of the $60 billion purchase price — is expected to be finalized shortly afterwards.

While still a work in progress, details about the proposed management setup post-merger have been released. In an internal memo from EMC Chairman, President & CEO Joe Tucci, it was announced that:

Jeremy Burton, who is now president of products and marketing for EMC, will be chief marketing officer;

-Jeff Clarke, currently vice chairman of operations and president of Dell, will retain those titles;

-Howard Elias and Rory Read will share the chief integration officer duties;

-David Goulden, CEO of the EMC Information Infrastructure group, will be president of merged company’s enterprise systems group, responsible for servers, storage, networking, and converged infrastructure;

-Rodney Rogers, CEO of the Virtustream cloud unit, will report to Goulden, as will Amit Yoran, president of RSA, and Rohit Ghai, president of the Enterprise Content Division;

-John Swainson, president of Dell Software; Tom Sweet, Dell’s chief financial officer; and Suresh Vaswani president of Dell Services, all will continue in their current roles; and,

-Michael Dell, who will be the merged company’s CEO, will appoint an executive committee comprising the presidents of all the aforementioned business units, along with VMware executive Pat Gelsinger; Pivotal chief executive officer Rob Mee; Virtustream chief executive Rodney Rogers, and SecureWorks president Mike Cote. EMC owns a majority stake in VMware and both EMC and VMware own stakes in Pivotal.

More recently, it was announced that Elias, president and chief operating officer for EMC’s Global Enterprise Services, will be president of the global services and IT unit of the merged company after the deal is complete.

“The combination of EMC and Dell creates a powerhouse in the IT industry with approximately $80 billion in revenues,” said Tucci at last week’s Q1 2016 earnings call (consolidated revenue of $5.5 billion). “Our Value Creation and Integration Office led by Howard Elias from EMC and Rory Reid from Dell has developed detailed integration plans to assure we hit the ground running when the merger closes.”

‘This deal is a game changer, and Dell has put itself in a central role,’ according to an IDC report issued shortly after the deal was announced. The research company believes EMC helps in two strategic areas:

-first, it expands Dell’s technology portfolio in private and public cloud, data management, and security; and,

-second, it provides Dell with greatly expanded selling capabilities in critically important global enterprises — many of which are also facing critical decisions regarding their own digital transformation.

However, it cautions that Dell must pay particular attention to this asset as it is one that is especially susceptible to disruption in major acquisitions.

A recent survey of customers not currently buying from either Dell or EMC turned up some surprising results, according to Steve Duplessie, Founder and Senior Analyst, Enterprise Strategy Group. Half of these organizations expect to work with them over this timeframe, while only 9% completely dismissed the notion of working with a combined Dell-EMC.

‘The take away from this research of non-Dell/EMC customers indicates that there is a possible growth opportunity outside of the current Dell and EMC customer bases, which frankly, I hadn’t put a lot of thought into. In particular, the point of innovation is important as I know firsthand from talking to executives at both Dell and EMC that they truly understand this and the notion that providing the customers with best in class technology options will be key to both retaining existing clients and capturing new ones.’

In light of ESG’s findings, it may not be surprising that at least a couple of analysts believe the pending deal is bad news for HP/E.

While history would tend to indicate that the Dell/EMC merger will end badly, i.e. the largest to date, the HP/Compaq deal, was nearly a train wreck, analyst Rob Enderle believes otherwise. Both Dell and EMC are very different from other technology companies. Plus, unlike HP/Compaq, the two firms aren’t both in trouble. ‘If this goes through HP is totally hosed.’

‘Will Dell and EMC be better off together than apart,’ asks analyst Charles King, Pund-IT? ‘Probably so.

“I think you could make the argument that with HP splitting into two companies, this gives Dell/EMC an opportunity to go after those customers,” King said. “In many ways, this couldn’t have come at a worse time for HP.”

This is not the first time Dell and EMC have partnered to shake up the industry. Under a reseller agreement signed back in 2001 and extended twice to 2013 (but was cancelled in 2011), Dell sold more than a billion dollars worth of EMC’s midrange and entry-level storage products.

It was a very profitable partnership for both companies:

-annually, EMC garnered 8% to 9% of its revenue from its relationship with Dell; and,

-for Dell, the partnership accounted for 50% of its storage revenue in years past.

“From a deal perspective, it lasted longer than most marriages.,” said ESG’s Duplessie. “They grew apart, it happens. It was great while it lasted; they both made a lot of money on it. EMC reached accounts they never would have been able to without Dell, and Dell learned how to become a storage company. Win/win if you ask me.”

Dell and EMC are hoping that it’s deja vu all over again. We’ll have to wait and see.

By The Numbers

EMC reported first-quarter profit of $268 million, up from $252 million a year earlier, but revenue slipped 2.5% to $5.48 billion. Sales in the VMware business rose a better-than-expected 5% from a year earlier, and EMC’s Pivotal segment, which offers cloud and big data software by subscription, revenue soared 56% from last year’s quarter.

Although now a private company — since October 2013 — Dell did have to disclose financial information to the U.S. Securities and Exchange Commission in regards to its pending EMC acquisition, including a $1.1 billion loss during the year, down slightly from the $1.2 billion it lost the year before. Other factoids included:

-in the fiscal year ended Jan. 29, Dell brought in $54.9 billion in revenue (78.9% product revenue and 21.1% services and software), a 6% decline from the $58.1 billion in brought in during the previous year;

-Enterprise Solutions Group consists of two components, servers and networking (up 3% to $12.8 billion), and storage (down more than 4% to $2.2 billion), saw overall revenue growth of 2% year over year to nearly $15 billion;

-operating expenses were trimmed 4%, to $10.2 billion, while research, development and engineering spending increased 9%, to $1.3 billion; and,

-in the event the deal doesn’t go through, EMC would be required to pay $2.5 billion to Dell and Dell would have to pay $4.5 billion to EMC.

Last month it was announced that NTT Data Corp., a unit of Japan’s former telephone monopoly, had agreed to buy Dell’s information-technology services businesses — built around the $3.9 billion Perot Systems acquisition in 2009 — for $3.06 billion. It’s part of an estimated $10-billion asset sale Dell has rumored to be pursuing, including the filing for a spinoff of its SecureWorks cybersecurity unit, and possible sales of SonicWALL and Quest Software.

In addition, EMC is looking to sell its Documentum business, as part of its plan to divest more than $6 billion in assets. The company bought Documentum, software used to secure and track corporate documents and files, for $1.7 billion in 2003, and reportedly generates annual revenue of about $600 million and profit margins of more than 30%.

Author: Steve Wexler

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