A number of interesting comments suggested nicely (thank you), that my piece last week on the Dell/EMC merger was wrong-headed. Those commenters believe, after reading a report in the New York Times with regard to financial performance that, financially, Dell couldn’t pull the merger off. A report in Re/Code looking at a leaked Dell compensation memo supports the same conclusion.
However, neither report concludes that the deal can’t be done (the NYT’s piece was from October of last year), only that in tougher times it would be far more difficult to pull off and that continued downward pressure on financial performance would stress the newly combined company. That is kind of like saying your brakes are bad and if you don’t fix them, you’ll have issues.
Finally, at least one comment mentioned the fact that Dell does small mergers, which have been successful, but that doesn’t mean a big one will be.
Let’s take the last comment first.
Big Mergers Suck
Trust me, I know. Big mergers suck, and I mentioned it in my prior post. The bigger they are, the more likely that things will be missed, and the complexity alone can be a massive headache. But Dell’s process of identifying assets and protecting them works really well with small companies. That process was developed by IBM, one of the very largest companies, so it should scale. However, just because something “should scale” doesn’t mean it will.
You also have to look at EMC, which is an umbrella company. This means the corporate headquarters is more like a holding company than your more typical integrated structure and many of the divisions are actually wholly owned subsidiaries (some are separately traded firms). Now, if you combine Dell’s “don’t fix it unless it is broken” approach with EMC’s unique structure, what you get, in effect, is the purchase of a bundle of small companies, not the purchase of one behemoth. And, initially, all you really take control over is the holding entity. Unless you work to disrupt that (and Dell’s process avoids such disruption), you should end up with minimal breakage.
Financials for Dell
Now, as noted, neither the New York Times nor the Re/Code piece indicates that Dell has dropped to a loss, only that it may not be meeting its own internal financial performance goals. The Re/Code piece suggests that the firm isn’t in any trouble, but the goals may have been excessive. If the firm were in trouble, it would have cut the bonuses altogether. Dell has just reduced them 25 percent, which means Dell has the cash, it just doesn’t want the employees to either think they can ignore goals or be penalized if the goals were excessively aggressive.
I’ve never liked bonuses based on anything but employee performance because they seem too much like luck to the employee and don’t work as well as incentives as a result. So Dell isn’t in distress, and while the deal will be expensive, there is no indication that Dell doesn’t have the funds to complete it. On the contrary, with the announced executive changes, it clearly believes the deal will complete in a few weeks.
HPE CEO Meg Whitman is clearly throwing a lot of FUD Dell’s way. She is an ex-politician and this kind of thing not only comes naturally to her, it is a normal part of the tech market. She is excited because her first quarter is going well, although it had a decline of 3 percent after she split the company in pieces. When you make a move like this, you pull in the expenses before the separation and push out the revenues so that the decision looks brilliant for at least one quarter.
That’s why we tend to look at a year’s performance and not just the first quarter after a change like this. It is interesting that Whitman references the IBM/Lenovo deal, but she actually gets that deal exactly wrong. IBM, like HP, tried to continue x86 servers after spinning off PCs, lost most of the volume discounts, and then couldn’t compete, so it had to spin off x86 servers and fall back on Power and the high-end market. HP doesn’t have a “Power” to fall back on, making me wonder if she actually listens in briefings.
Much of what Whitman says lacks anything solid behind it, making it clear that she’s got the political promise thing down. But, at some point, it might be nice to see one of the “amazing innovations” supposedly coming out of the company. Dell won’t be able to adequately defend against the HP FUD until the deal is settled. Until it has more than one marginally good quarter under its belt, it might be wise to hold back a bit on the rocks.
Wrapping Up: Deal Still Looks Strong
I never said the Dell/EMC merger would be easy. It won’t be. But Dell has the best process to pull something like this off and EMC has the best structure, for a company at that scale, to be acquired. The two together should more likely make this merger successful. Unless there is a major problem that hasn’t been found, I still believe this is the best outcome for both firms. Oh, and on the HP thing, wasn’t Whitman trying to buy EMC before Dell stole it? With HP’s process, that would have been a disaster -- remember Palm? So I get that Whitman is unhappy. I also get why EMC ran from that deal like their lives depended on it.
In any case, the financial disclosures don’t indicate any major financial problem that will damage the deal. HP FUD aside, the process and structure should make this process work reasonably well and, in any case, we’ll know in a few weeks whether the facts actually do support the conclusion.
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+