Dell’s EMC, VMware Buy Is A $67 Billion Bet On Cloud Computing That May Be Too Late

LONDON -- Dell’s record-breaking deal to purchase EMC is a $67 billion bet the PC industry is dead, and tech is now moving into an era when cloud computing dominates. The move shows Dell wants to own every aspect of business computing -- from hardware to services, security and big-data analysis. The question is, has that move come too late?

There's no shortage of competition. IBM acquired cloud specialist SoftLayer in 2013 for $2 billion after selling off its PC business to Lenovo in 2005. In the most recent quarter, Big Blue reported a 70 percent increase in cloud-related revenue. Oracle is on pace to post cloud revenues of $2 billion in fiscal year 2016, up from $1.5 billion the previous year. Microsoft is forging ahead with its Azure cloud platform, and Amazon Web Services is poised become the biggest player of all, with revenues up 81 percent in 2015 compared to last year.

What's driving the market? The cloud makes it easier and less costly for businesses -- from healthcare companies to Wall Street investment banks -- to store and process critical data. It's also where consumers are parking everything from music playlists to photos and contacts.

Michael Dell knew that trying to survive in the smartphone era as a company that primarily sold PCs was not sustainable. That's why in late 2013, with the backing of his partners at Silver Lake, he took the company he founded in his dorm room three decades ago private again, to give himself some breathing space from shareholders' demands.

His plan was to refocus on the enterprise market, and that vision came into sharp relief Monday when Dell announced the largest deal in the history of the enterprise technology industry with the $33.15-per-share takeover of EMC. The deal, which remains subject to regulatory approvals, includes EMC's 80 percent stake in VMware, which specializes in software that allows cloud providers to host and isolate data from multiple customers on a single server through a process known as virtualization. VMware trades separately and boasts a market cap of $40 billion, compared to $56 billion for EMC.

EMC CEO Joe Tucci, who will join Dell, contends the era of traditional on-site computing in corporate data centers is coming to an end, telling analysts after the announcement: “We are entering a new era where the IT landscape is seeing massive disruption and vast opportunities.”

Dinosaurs Mating Merger?

This deal creates the largest privately held tech company in the world, but it's not seen by everyone as a sure-fire success, with one analyst predicting disaster. "There are two major trends that have fundamentally changed enterprise computing, one of them is cloud, and the other is mobile," Stephen Beck, managing partner of management consultancy cg42 , told International Business Times. "The Dell-EMC combo does nothing for either one; hence, it looks to me like a dinosaurs mating merger."

However speaking to analysts after the announcement, Dell said his company was already heavily entrenched in the cloud market, from a hardware point of view. “I think the combined company is very well-positioned to address the move to the cloud. Remember: Dell has been providing infrastructure to public clouds, private clouds, hybrid clouds for a long time and has done quite well there."

For most people outside the tech sphere, EMC will be a relative unknown. Nominally a data storage company, the real value -- and the reason Dell has paid so much for it -- lies in a suite of subsidiaries it calls its Federation. The most notable is VMware. It is a highly valued asset that is key to allowing companies to make the most of the cloud. Its services let businesses manage data centers more easily, reducing costs while improving efficiency.

EMC’s data storage business may still make up the majority of its overall revenue, but that will change as the world moves to the cloud for its computing needs and companies of all sizes look to entities like VMware to help them manage these operations. In preliminary financial results announced Monday, VMware raised its outlook for the third quarter with revenue expected to rise 10 percent to $1.67 billion, indicating its continued growth in the market.

The problem for EMC VMware is that it's competing against some of the biggest companies in the world with Amazon's AWS and Microsoft's Azure service occupying the top two positions in the market, leaving Dell with a lot of work to do.

"For all their efforts, EMC and VMware are still niche players in the cloud. EMC knows it has work to do to make itself a bigger player in the cloud space. I think this Dell relationship will help them gain clout in order to have a better story," Werner Zurcher, Gartner's lead analyst on EMC, told IBT.

One-Stop Shop

Dell’s vision is of a one-stop shop where IT departments will be able to buy everything from laptops and tablets to servers, storage and, crucially, services from the same company. It is a big bet at a time when others are looking to spin off their operations into smaller entities with narrower focus, as HP is attempting to do with its consumer and enterprise businesses. Dell, in his analyst call, played up the complementary nature of its business and EMC's, but that may not be what customers are looking for.

"Did [Dell] ask the customer if they want a one-stop shop?" Beck asked. "All these things together theoretically creates synergy and creates value but only realistically if there is a higher level of security or some other added benefit, or you reduce price to drive more share."

Beck said because the market has moved away from proprietary software and hardware and embraced open source, particularly in corporate environments, it is unclear if Dell will be offering what the market needs or wants.

The success or failure of this record-breaking merger won't be known for years to come, but in the short term, Dell and EMC will face big challenges, most notably competing against the myriad of small and large providers that have grown up in cloud-based enterprises. To finance this deal, Dell is incurring a huge amount of debt, and as a result of having to service that debt, it will limit its ability to invest in other areas, such as research and development in the short term. In an industry built on innovation, this could have a serious impact.