Has Michael Dell hit a home-run with the EMC acquisition?
Almost a year ago, in October 2015, Michael Dell announced that the computing giant would be acquiring the storage company EMC for $67B (at the time of announcement), making it the largest technology M&A deal in history. Industry experts questioned the feasibility of this deal, many even claiming that it will be a train wreck, as the smaller fish Dell ($4.25B in cash) intended to eat the much larger whale, financing around $50B from debt.
A fair argument in favor of Dell deciding to buy EMC is its historical struggle to grow the enterprise side of its business in part because there aren’t many large enterprise tech companies worth buying. EMC is different, since it has a number of market leaders under its corporate wings. It is the leader in traditional storage gear and owns two players (VCE, VMWare) in the up-and-coming business of flash memory storage, XtremeIO and ScaleIO. The blockbuster deal covers server, storage, virtualization, security, networking, cloud, content management and end-point computing.
The synergies in product lines and services between the two companies are very strong. The enterprise servers business, including cloud computing, is huge, but Dell brings with it a strong presence in the client computing market. The merger will allow the sales team to leverage multiple product lines to cross-sell and up-sell to the customers. With the increased in-house capabilities in products and services, Dell and EMC combined will be able to compete much better v/s the likes of HP and IBM.
Many industry experts are concerned that this deal will not be profitable, similar to the HP Compaq merger, which is a legit concern because larger mergers generally fail. But this is different, for the following reasons:
- Neither of the firms is under financial distress.
- EMC was under huge pressure by activist investors to break up.
- Both companies are working on a 2-year merger plan that focuses on identifying and protecting their key assets, and does not worry about forcing the culture and structure of the purchasing company on the purchased firm.
The deal was completed recently, and the new company will be named Dell Technologies. With more than $70B in revenue, Dell Technologies, the world’s largest privately controlled tech company, aims to be a one-stop shop for IT services. With combined synergies leading to a portfolio expansion, and reduced costs, my money is on Dell Technologies. It will be interesting to see though how quickly new company would be able to generate the cash flows needed to pay off the stellar $50B debt.