Dell and EMC Merger: The Likely Back Story

Rob Enderle

Today the Wall Street Journal and other outlets broke the speculation that Dell and EMC were looking to merge. I don’t think people get how incredibly powerful this would be or how difficult. However, this would clearly solve huge problems that both companies are facing, and unique synergies and relationships make this whole effort, if true, incredibly interesting.

We’ll first talk about the unique problems both firms are trying to address and then how the merger would help mitigate them.

EMC

EMC’s biggest problems at the moment are massive pressures to break the company up in order for some investors to take high profits by selling their interests. This is problematic on two fronts. First, it would undo years of work that created EMC and it is tactical and would likely damage EMC’s long-term viability and competitiveness. Second, Joe Tucci, the guy who put the company together, has been looking to retire, but finding someone with the breadth and experience to run a company like EMC is problematic (as HP has repeatedly found). Tucci and the EMC board don’t want to create the same train wreck that HP has become, but finding someone who has the skills and is willing to leave their current job to run EMC has been a problem, which has pushed Tucci’s retirement out indefinitely.

Dell


Dell is private now and paying down its debt at an impressive rate. This freedom from investors, particularly “activist” investors, has allowed Dell to become far more agile and successful, which is why it is able to pay off this debt. However, it also makes it difficult for the firm to grow as aggressively as it would like, particularly in the enterprise storage space. Dell would like a stronger large enterprise presence but growing that presence organically can take decades. With HP weak and IBM smaller, a huge opportunity exists to expand far more aggressively but the mechanism to get there fast is only through acquisition.

Dell + EMC

If EMC were under the Dell umbrella, it would be private, at least initially, and this would remove much, if not all, of the pressure to break it up. If it had to go public again, it could use the Facebook or Google model, which would deny “activist” investors power and limit their influence sharply. This would allow the combined company to more aggressively position for the future and invest strategically instead of focusing on keeping large investors happily tactically and quarterly. Michael Dell would be on the short list of CEOs capable of running EMC. Tucci and Dell are, according to Tucci, friends and they can work together successfully. This would allow Tucci to step down, assured that the company he built would be safe.

EMC would give Dell the scale to more aggressively go after the opportunity represented by a badly wounded HP (HP is undergoing an unprecedented staffing reduction of nearly a third of its workforce and is in the process of splitting the company, creating massive opportunities to acquire recently disenfranchised customers). This window won’t be open indefinitely and a combined Dell/EMC could far more effectively target this opportunity. It would open solutions like EMC’s massive IT shop in a box, VCE, to Dell and the resulting control over VMware would be massively helpful to Dell’s server business. Finally, Pivotal, when combined with Dell’s software resources, would give Dell a total software footprint that could rival IBM’s.

Wrapping Up: But Oh, the Execution

Merging a private and a public company at this scale is rarely done. The same “activist” investors who want to break EMC up likely won’t support this move and corporate raiders like Carl Icahn may attempt to sweep in and profit. However, Michael Dell faced similar challenges when he took Dell private and he overcame them, suggesting that he can overcome these. We’ll see, but a private company at the scale of the old IBM would be uniquely powerful because, without the distraction of quarterly reports and compliance, the combined firm would have huge advantages in terms of anticipating and building for the next big thing, which is expected to be artificial intelligence.

If these two companies can pull this off, it would be amazing, but “if” is a big word given the level of difficulty.

Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm.  With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+



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