The Dell-EMC Deal: Brilliant or Delusional?

October 20, 2015

“The combination of Dell and EMC creates an enterprise solutions powerhouse.”

– Dell’s founder, CEO & chairman Michael Dell, announcing the acquisition on Oct. 5

My main focus in this post is on strategy, business models, and culture. Not surprisingly, since this putative acquisition was announced two weeks ago, many financial experts and technically savvy observers have expressed contrasting perspectives on this surprising-but-not-so-surprising bet by Michael Dell and his financial partner, the private equity firm Silver Lake.

Among other impacts, major acquisitions and mergers have a habit of registering high on the Richter scale as far as the competitive landscape is concerned. So, apart from commenting on the outlook for these companies once they merge, it’s well worth considering the impact on Cisco, IBM, HP, Microsoft, Oracle, and SAP who are the six traditional global IT systems incumbents today. For example, many observers pegged Cisco as a potential acquirer of EMC rather than Dell, so has Cisco blown its chance to enhance its software and storage assets? Systems integration giants such as Accenture, Deloitte, CapGemini, Cognizant, Tata, and Infosys will also be affected in different ways, most likely wanting to figure out what threats and opportunities the merged company represents for their business advisory and systems integration practices.

Even the web and mobile consumer giants Apple, Google, and Amazon, and telecoms-cum-internet incumbents such as AT&T, Verizon, Vodafone, and CenturyLink, among other major U.S. and European players, will be watching intently, since their busines stand to either profit or lose in the form of direct competition and/or co-opetition via new alliances. And of course, we can’t forget the all-important constituency of customers, who generally hold the swing vote with these things. Enterprise and government customers will be adjusting their calibrating their IT investment strategies based on how they perceive the new company to be focusing on meeting their needs, especially in the next year or so while the acquisition is being scrutinized by regulators, and the next year or two while the combined entity comes together.

Perhaps more than any other single player or group of companies, Amazon Web Services (AWS) and the entire public cloud movement looms over this merger like a massive storm system that has already hit land and is buffeting these companies badly. When the CIO of GE, Jim Fowler, announced at Amazon’s recent Re:Invent conference in Las Vegas that “AWS will be the trusted partner that will run our company’s information technology for the next 140 years”, reminding us of the long history of the world’s largest industrial conglomerate, you could be forgiven for sensing a potential tipping point even more significant than the one a year or so ago when AWS won a multi-year contract worth $600m. from the CIA in an intensely disputed bid against IBM.

Along with other industry watchers, I don’t anticipate that GE’s announcement means that AWS will run literally all of their existing and new systems anytime soon. Traditional mission-critical systems of record applications will probably remain in legacy form on premise for many years, rather as mainframe computers have remained part of every larger organization’s IT landscape since they were first forecast to be replaced thirty-five years ago when the PC and later the Unix server arrived on the scene. But I’m sure that GE is deadly serious about new cloud-based systems of engagement applications, which will form 80%+ of their IT investment going forward. Based on its accelerating growth among enterprise-grade organizations and despite its much smaller size as compared to the other members, AWS is beginning to demand a place in the club of global IT systems vendors, whose traditional hardware sales and software licensing businesses are now in serious jeopardy. This, despite their own growing investments to build significant cloud-based businesses.

Thus, announcements such as GE’s, if (and when) echoed by increasing members of the Fortune 100 and by an equivalent body of major state and national government agencies around the world, spells dark days for the Club. Although they are all now paddling furiously to bulk up their new cloud businesses, IBM, HP, Oracle and SAP are still understandably struggling to migrate the bulk of their revenues, growth, and profits from traditional hardware acquisition and software licensing to subscription and consumption based models. The same applies to Cisco, while software-centric Microsoft looks to be managing a faster migration due in part to CEO Satya Nadella’s commitment to Azure, Office 365 and similar initiatives. Equivalent struggles are impacting the BPO and systems integration businesses that drive each of the six global systems companies’ professional services businesses, not to mention those of the full-time systems integration firms like Accenture, Deloitte and Infosys.

Cloud-scale businesses don’t require the massive and endless overload of systems integration work that the client/server era imposed on customers, and that enabled the rapid growth of armies of project implementation consultants. Today’s new business model demands that professional service companies focus on customer business outcomes, not IT outcomes. Thus, adoption and engagement services represent the new mother lode, but most major SI firms are some way behind in staffing up with multi-skilled customer success architects (CSAs, covered in my last post). As for wireless carriers and even internet-focused cable conglomerates, it’s difficult to see them managing to innovate quickly enough to compete effectively in this new marketplace. In a nutshell, most or all of the large enterprise systems incumbents will continue to navigate the Nasty Bit between managing their mature businesses for margins and earnings, and driving revenue growth in their newer – and/or newly acquired – cloud, mobiility, analytics, and cyber-security businesses. Each of the established giants anchored their earlier growth around one or more powerful product franchises – IBM in mainframe computing, Oracle in database management, SAP in ERP, Microsoft in Windows and Office, Cisco in network switches and routers, and the heavy inertia imposed by their existing business models, organizations, and expertise.

So what does all this mean for Dell, the new owner of EMC assuming that EMC doesn’t find a more aggressive buyer and that the acquisition passes regulatory scrutiny by the middle of 2016, the anticipated timeline announced by the company? And what about the assets that EMC brings to the table and that led Dell to line up sufficient financing in order to offfer $67bn. for EMC plus 80% of VMware? What are the Pros and Cons, as well as the Intangibles and even Unknowables, and what can we tell about how they net out?


  1. Enterprise powerhouse: Michael Dell’s assertion that the combination of Dell and EMC creates an enterprise solutions powerhouse may have real merit. Certainly, Dell gains credibility and access within the very large enterprise and government organizations that EMC has cultivated for over two decades. And EMC gains some product offerings for enterprise customers that it has sourced with partners till now.

  2. Product portfolios: The companies have largely complementary products and services, unusually so in a fusion of this magnitude. The relatively few areas of overlap can partly be resolved by, for example, replacing Cisco servers in EMC’s VCE converged infrastructure with Dell servers, or by end-of-lifeing one or other EMC offering in favor of its Dell equivalent, or vice-versa.

  3. Private ownership: Dell itself has had the benefit of being in private hands for two years now since Silver Lake and Michael Dell led the acquisition, in order to restructure and rebuild its business to perform in the new cloudified environment. By extending this benefit to EMC, which was in a slow but accelerating decline, the new management team will have time out of the glare of the public markets and quarterly earnings scrutiny to leverage their joint assets to achieve accelerated growth. Thus, you could say without fear of exaggeration that this merger might save EMC’s bacon.

  4. Growth products: Both companies have made significant and complementary investments in important emerging growth technologies such as private, public, and hybrid cloud (Pivotal, Cloud Foundry, Virtustream), converged infrastructure (VCE initiative, including Cisco), cyber security (RSA, SecureWorks), big data analytics (Greenplum), scale-out storage (Isilon), software defined networking (Nicira, acquired by VMware), and enterprise systems integration (Perot Systems). If the new organization can combine their efforts and expertise to, for example, become a clear leader in cyber-security as well as in all form-factors of the cloud, this could portend strong future growth.

  5. The VMware factor: As a new 80% owned entity, though still a public company, VMware’s dominant franchise in virtualization among major enterprise and government organizations continues to be threatened with commoditizing offers from Microsoft and Citrix, whose virtualization offerings are considerably less expensive to license and run. As the new majority owner of VMware, Dell could exert a positive influence to reduce the deep resentment that customers feel when pressed to renew their virtualization license at astronomical annual license/maintenance fees, by making pricing more amenable and thus eliminating a serious bone of contention with otherwise happy customers.


  1. Combining two declining businesses: Strategically, it’s not usually a winning recipe to bring together two large and diversified businesses that are in decline or otherwise in repair mode, and expect that the combination will be stronger than the companies were as separate units. I belong to the school of thinking that that says that “two sick chimps do not a gorilla make”. The poignant image of two ailing giants banding together to survive in a hostile new world is painful to contemplate. This is not to suggest that the Dell-EMC merger cannot possibly succeed, nor that each company doesn’t have its bright spots and in some cases considerable promise, just that this type and size of acquisition doesn’t normally work out too well. For one thing, there is no dominant and still-growing line of business to use as a platform. Nonetheless, per Michael Dell’s statement at the beginning of this article, one thing for sure is that by acquiring EMC, Dell joins the new Global Enterprise Systems Club. You might ask, to paraphrase Groucho Marx, if this is still a club you’d want to be a member of in light of the struggles that each of the members is experiencing in the new environment, but…

  2. Focus on customers: The focus on serving their customers’ requirements while approval of the merger remains pending till mid-2016 and then while the merger of the two organizations is being implemented, will almost certainly give way to other preoccupations while the kinks are being worked out. The change management task to combine the various products, services, and organizations of these two already-huge and diversified companies should not be under-estimated. Werner Zurcher, research VP for IT storage and disaster recovery at Gartner, told the trade publication Information Age that “the scale of work required to complete the merger will likely result in management focusing less on customers for at least two years, while users of products to be obsoleted will be inconvenienced.”

  3. The AWS factor: The mind-boggling advance of AWS, and the rapid pace of innovation that it is setting with its agile web-scale computing and deep dev/ops knowhow and resources for launching new capabilities and offerings, will be hard to compete against. With $7bn. in 2015 run-rate revenues and growth of around 80%, AWS looks today like the jewel in Amazon’s crown. As Quentin Hardy of the New York Times wrote on October 12, it might not be too long before “AWS will be the company that also happens to own an online retailer.”

  4. Business model migration: Besides cultural change, business model migration is the cruelest of challenges. Companies typically take a decade or more to successfully migrate from one model to another. Companies “born in the cloud” have a huge advantage over those that are trying to move to the new subscription and/or usage models. For companies that grew up in earlier eras, their entire business and organization need to be over-hauled, from how they architect and engineer their products to how they sell, implement and support their deployment and utilization.

  5. Culture: I started this section on Cons with a strategic issue regarding the dynamics of combining two large, successful but somewhat weakened players. My last point is about culture, keeping in mind the saying that “culture always trumps strategy”. To bring together a traditional East Coast organizational culture with a frugal, founder-dominated culture based in the more modern technology environment of Austin, Texas doesn’t feel like the most difficult challenge imaginable, but it’s not far off. As with the other challenges I’ve identified, I’m quite sure that Michael Dell and Silver Lake have given thought to all of these factors, and will do everything in their power to handle them effectively. However, what we’re talking about here is a massive challenge that requires tremendous feel as well as sophisticated business analysis. It requires that somehow the leadership can bring together and inspire employees and managers who today work in two quite different environments, without incurring the unintended and very undesirable consequence of a brain drain. One of the main bugbears of tech mergers is that, rather than losing the people that you think you can “afford” to lose as you seek economies of scale through selective RIFs, instead you find that too many of your go-to players decide that “it’s not fun anymore, we’ve lost sight of our original vision, I’m going elsewhere.” This inevitable and highly demanding challenge will require enormous management and communications skill to pull off if the new company is to avoid seeing the more valued of its walking assets walk away.

Before judging the Pros versus the Cons let’s take into account one or two intangibles and even unknowables.

Intangibles and Unknowables

The biggest intangible for me is this: After revolutionizing the PC and Intel server industry twice, can Michael Dell do it again? Furthermore, does he have the fire and imagination to do so? At this point I prefer to give him the benefit of the doubt and not bet against him. What he accomplished in redefining the business model for making and selling personal computers on two separate occasions – first, by pioneering the direct selling model from his dorm room at UT in Austin, then by reinventing the traditional marketing-to-order-to-cash process as an order-to-cash-to-assembly-to-delivery process, thus ensuring that Dell received payment from customers before it had paid its materials, assembly and distribution expenses – were landmarks in the evolution of our industry. Why assume that Michael Dell, like Steve Jobs before him, cannot gain redemption for the frustration he has experienced in the past seven or eight years, as his company has languished, by making new ground-breaking bets and thinking smarter than his new closest rivals?

Another intangible relates to Michael Dell’s principal partner in crime: Silver Lake was the original purely tech-focused private equity firm, born in 1999 out of a few Tier 1 VC firms. Silver Lake understands the tech industry, and they have the pick of accomplished former tech entrepreneurs and executives to deploy into their portfolio companies to help turn around the business. Michael Dell will be able to count on Silver Lake’s considerable resources as he and his team start absorbing EMC into the new Dell company.

A key unknowable for me at this juncture is this: What after-shocks will this earthquake set off in the industry? How will it affect the growth and acquisition strategies of IBM, Cisco, AWS and others? In a similar vein, how long will it take for IBM or HP to make their next major acquisitions or – more likely in my view – go private themselves, for reasons not too dissimilar than the ones that have led to this merger? In turn, these as-yet unknowable moves will Inevitably have some kind of impact, beneficial or otherwise, on the post-EMC Dell.

Before ending, I do have one concern outside the strategy, business model, and culture area. This is with respect to the debt load of around $50bn. that Dell will need to service once the acquisition is approved. This aspect is one that I’m not an expert in, but finance and debt generally impact strategy, and especially the execution thereof. Debt loads such as this are scary, especially if and when interest rates increase. But as I say, I’ll leave this issue largely for others to comment on.

One thing for sure – Mega-mergers get everyone’s juices flowing. They spark reactions from competitors and commentary everywhere in the industry, and they most definitely impact the marketplace, whether beneficially, detrimentally, or a mix of the two. It will be fascinating to see how this particularly high wire act plays out.