Dell set to buy EMC – Wow!

For Sally….

Today Dell announced that it has made a $67B bid to buy EMC. In the last year this would have given the new company a market share of 2.0% of the total $3.8T IT market – jumping over Microsoft into fifth place.

You’ll want to learn more about the implications. In the Figure we combine the revenues of Dell, EMC and VMware to produce the shares for the proposed new company – named ‘Dell*’ here. See our earlier analysis of Dell’s strategy.
The storage array world was once a happier place in which EMC’s dominance was recognised through partnerships with lots of other system vendors. Dell however went further than Fujitsu Siemens and HP to design and ship common Dell:EMC named NAS arrays. Writing at the time I noted that EMC was strong in large companies and Dell, in small and medium ones. However all of these partnerships ended in divorce, as systems vendors set up their own storage systems businesses. In Dell’s case the acquisition of EqualLogic, a high-end SAN vendor for $1.4 billion in January 2008 was a brave move, given the decade of success with EMC, when the Dell:EMC arrays accounted for 50% of Dell’s storage revenues. Dell then added Exanet’s clustering assets, Ocarina Neworks and Compellent to build its storage business. However the traditional array business didn’t grow significantly. Dell has been supporting the use of less formal devices, techniques and architectures. Buying EMC will give it market leadership of the array market: it will also give it EMC’s strongly differentiated sales strategy and – with ViPR – some fantastic storage software. However it will also need to go through yet more harmonisation to get all of its products to work together (something EMC arguably never did very well for its own portfolio). In the year to June the combined company’s market share would have been 29.7%, rather than the 24.4% share held by EMC at the time.

In the server market VCE (since last year a federated EMC product, rather than a shared one with Cisco) will bolster Dell’s converged infrastructure product line. Dell’s server market share will be boosted and Cisco’s deflated by the inevitable swapping of VCE engines from UCS to PowerEdge. The addition of EMC’s recently acquired Virtustream will also give Dell a much stronger position as a direct supplier of IaaS/PaaS cloud services.

Although the Infrastructure Software market was worth only $30B in revenues in the year, it is probably the area in which the new company will be most successful, especially as EMC currently has an 81% stake in VMware. In today’s announcement Dell intends to leave VMware as a publicly listed company, rather than swallowing it into its private company structure (planned for the rest of EMC). The combined business would have given market leadership and a share of 3.7% in the year. If it can keep these 3 lines of business Dell will be in a superb position to control and direct the movements towards a ‘software defined’ world. However I expect VMware to assert its independence as it will be no more comfortable with Dell rather than EMC as majority share holder.

There’s may a slip between cup and lip and it wouldn’t be a surprise if another vendor seduced EMC away from Dell. EMC has a ‘go shop’ clause, which makes such a move more likely perhaps – Remember that 3Par was wrested from Dell’s grasp by HP in 2010.

While I and other analysts will groan about the loss of yet another set of financial results should Dell’s plan go ahead, I can’t deny that this is a very smart move from Dell, especially given IBM’s offload, HP’s split and Huawei build-up of its business in Europe. I’ll be following events as closely as I can.