Top 10 Strategic Technology Trends for 2016
Mergers in the high-tech industry, or any industry for that matter, are usually driven by two factors: financial considerations and market opportunities. When it comes to a mega-merger like the one brewing around Dell and EMC, both factors are kicked into overdrive.
The Wall Street Journal reported earlier this week that Dell has stepped up as a potential buyer for EMC (subscription required) which, based on the latter’s estimated market cap of $50 billion, would make it the second largest M&A of the year, behind the Time Warner/Charter Communications deal valued at $78 billion. Negotiations are very fluid, however, with the WSJ reporting that the deal could come together within a week, or not at all. If successful, the deal would eclipse the largest pure-tech deal to date – Avago’s $37 billion buyout of Broadcom. Failure, however, would put EMC in a bad way considering potential buyers like Oracle, HP and Cisco are said to have already passed on acquiring the company.
On the financial side, the big factor is debt, says the New York Times’ Amie Tsang. Dell already has a fairly sizable debt load resulting from owner Michael Dell’s move to take the company private. At a time when equity markets are becoming stingier, an EMC buyout would require a cool $40 billion at least. Part of that could come from selling additional shares of VMware, 80 percent of which are owned by EMC. If Dell were to sell, say, 20 percent of that stake, that would generate about $7 billion to help finance the deal. And, of course, there is the little matter of Elliott Management, the activist hedge fund that owns only about 2 percent of EMC but carries enough clout to quash any deal if it doesn’t feel the numbers add up.
The one thing the merger has going for it is that the two companies inhabit largely complementary spaces in the IT market, with very little overlap, says RE/Code’s Arik Hesseldahl. Dell would be able to leverage its traditional PC, server and peripherals lines to tap into core infrastructure and services demanded by the enterprise and the emerging cloud provider market, while EMC would gain opportunities beyond its traditional storage base into converged and commoditized platforms. At the same time, it would provide EMC chief Joe Tucci the exit strategy he is said to be looking for, and it should, if crafted properly, remove some of the heat from Elliott and other investors who are demanding greater shareholder returns.
But when two companies are both tops in stagnant or declining markets, such as PCs and storage, how can anyone expect them to outperform going forward? As Fortune’s Stacey Higgenbotham points out, that’s like tying two bricks together and expecting them to float. Both companies have already made strategic acquisitions of their own to address the growing cloud market – namely, Virtustream for EMC and Boomi for Dell – but it is doubtful that these alone will be able to compensate for the declining fortunes of their core businesses. And even though VMware essentially kicked off the cloud industry by virtualizing hardware, technologies like containers are already finding ways to support cloud services by bypassing the virtual layer to reside on bare-metal infrastructure.
A Dell-EMC tie-up would also stand in stark contrast to the prevailing trend in tech circles of separating hardware businesses like PCs from more lucrative enterprise-class systems and services, the HP breakup being the latest example. As margins tighten on commodity hardware and organizations increasingly gravitate toward defining higher-order systems architectures in software, conventional wisdom holds that tech companies should shed older, less profitable product lines to focus on growth markets.
All of this is pure speculation, however. As of this posting, no deal has been struck. But if both sides walk away from the table, they will still face these same realities as separate companies: How do you transition from the old IT market to the new without spoiling your bread and butter?
Arthur Cole writes about infrastructure for IT Business Edge. Cole has been covering the high-tech media and computing industries for more than 20 years, having served as editor of TV Technology, Video Technology News, Internet News and Multimedia Weekly. His contributions have appeared in Communications Today and Enterprise Networking Planet and as web content for numerous high-tech clients like TwinStrata and Carpathia. Follow Art on Twitter @acole602.
