Four questions about the Dell-EMC merger

Dell has dropped a bomb on the enterprise IT market by announcing plans to buy storage giant EMC for a whopping US$67 billion. The deal raises many questions; here are four of them.

Where’s the Cloud?

Assuming it goes ahead, the deal will make Dell one of the world's largest IT vendors, just behind IBM and Microsoft, but Dell will still have little to offer in the fast-growing area of Cloud services. Oracle, IBM and Hewlett-Packard are all building out Cloud offerings with varying degrees of success, but it's not something Dell has focused on, and buying EMC won't change that. How much that matters is an open question.

“This deal makes Dell a far stronger player in the traditional sense of IT technology vendors. The problem is, the future belongs to non-traditional players,” says Glenn O’Donnell, a research director at Forrester.

Most large companies are using some combination of public and private clouds, and Dell needs to show it can be a go-to provider for those organizations. But that doesn’t mean it needs to operate its own cloud, and going head to head with Amazon Web Services or Microsoft Azure would be a costly mistake, O’Donnell said.

Instead, Dell can provide the converged infrastructure for building on-premises private clouds, then offer middleware that connects those systems to services like Azure and AWS. EMC owns around 80 percent of VMware, which sells that type of software, and Dell has Boomi and other cloud integration products.

Dell also sells hardware to the companies building Cloud services, something CEO Michael Dell highlighted on a conference call Monday.

Crawford Del Prete, chief research officer at IDC, doesn't think Dell needs a Cloud service today, either -- though he predicts it will need to revisit that strategy over time.

That would mean spending heavily on new datacentres or another acquisition, neither of which are likely to be top of mind right now for Michael Dell.

What happens to the VMware-Cisco-EMC partnership?

EMC joined with Cisco and VMware six years ago to form a company called VCE, which sells converged infrastructure systems that combine compute, network and storage in preconfigured blocks.

Dell and EMC said that partnership will continue. “Our VCE business, when connected to Dell’s products and services, will grow faster and have a much larger impact on the industry than either one of us could individually,” EMC's CEO Joe Tucci said in a blog post.

But the EMC deal opens the door for Dell to sell more of its own servers and network gear into those converged systems, and O’Donnell was pessimistic. “The VCE effort is dead, in my opinion,” he said. Cisco has already scaled back its investment, he noted, and he expects Michael Dell to reduce EMC's involvement too.

He estimates that VCE does about $1 billion in sales annually; it hasn't grown more, he thinks, because VCE is a partnership rather than a "real company," making customers wary. “Dell now has an opportunity to create a truly unified equivalent, and to do it better,” he said.

Del Prete sees a more pragmatic path from Dell. It can’t match what Cisco brings to VCE in terms of network equipment, he said, so he doesn’t see any big changes in the near term.

“I would expect Dell to try to capture more value from those deals, but Michael is a savvy guy, he knows that to have the best-in-class networking and that he needs to work with Cisco," he said.

What does the acquisition mean for rivals?

Even if the VCE partnership continues, Cisco is looking at a very different competitive landscape moving forward, and that will spark internal discussion about its long-term strategy.

“I don’t see anything imminent, but they need to think hard about who they partner with and about potential mergers moving forward,” said Del Prete.

“Converged is the order of the day, which means Cisco has to think about how they build those systems and who they partner with, because EMC is not the same company it was last night,” he said.

As for HP, it would have dwarfed a combined Dell-EMC, but it chose to split into two companies on Nov. 1, and HP Enterprise will now be a smaller entity. CEO Meg Whitman put a positive spin on the news, telling employees in a memo that Dell will be paying $2.5 billion in interest alone to complete the deal, according to reports.

But the deal only increases the pressure on HP to show it can grow its own business.

"This deal probably accelerates HP Enterprise's timetable for meaningful acquisitions, because the music's going to a faster beat now," said IDC's Del Prete.

Analyst Rob Enderle, who's been critical of the HP split, was far less sanguine. "If this goes through, HP is totally hosed," he said in a blog post. "Dell would appear as a far more complete vendor than HP, and with HP’s crippling layoffs its customers will quickly be looking for enterprise class alternatives."

Will there be layoffs at Dell-EMC?

Some cuts are inevitable, but perhaps not as many as you’d think in a deal this size.

“There are certainly some cost synergies, we’re not going to tell you there aren’t, but there are other companies in the industry that are much better at reducing headcount," Michael Dell said, a bit sarcastically, on Monday's conference call. He was likely thinking of HP, which has already cut 55,000 jobs and will now eliminate as many as 30,000 more. A big difference with Dell is that it's a private company, so it's not under as much pressure as HP to cut costs.

In addition, Dell needs EMC's salesforce to make the transaction work. Dell plays mainly in the mid-market, and it wants EMC to help it sell products to larger customers. Dell also hopes that it's own sales team can bring some EMC products to smaller customers than it sells to today.

“This deal succeeds or not based on Dell’s ability to leverage and capture value from that EMC salesforce. They’re best of breed in the industry,” said IDC's Del Prete.