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Dell-EMC deal comes with plenty of risks

Dell finalized plans to purchase EMC this week, in a deal that analysts said could pay dividends for enterprise customers – if it succeeds, that is.

Dell's acquisition of EMC and VMware should have strategic merit for enterprise customers, but the deal is also...

a risky one. 

After weeks of speculation, Dell formalized its acquisition of EMC for $67 billion, the largest tech acquisition of all time.

The deal benefits are clearly advantageous to Dell, said Charles King, president of Pund-IT of Hayward, Calif.

Dell does very well in the SMB enterprise space but has had trouble cracking the code for larger organizations, he said. Meanwhile, large enterprises are EMC's sweet spot and it has a massive portfolio of hardware, software and services that are aimed specifically at the needs of enterprises, he said.

EMC has done well to expand its footprint in software and outreach to developers through Pivotal, King said, something that could be an invaluable resource for Dell. Pivotal and the EMC Federation have done well to engage with the software industry and as EMC goes under Dell's private ownership, it will allow it to manage the products and services it has without any second guessing by outside groups.

"The fact is – the addition of EMC [products] and services will benefit Dell but so will EMC's relationships with thousands of larger enterprise organizations," King said.

Another analyst however contends the merger is risky business.

The respective core markets for all three companies, particularly, Dell and EMC are under attack, according to Dana Gardner, principal analyst with Interarbor Solutions, LLC in Gilford, NH.  Dell faces increasing pressures in the server markets with competition from HP and Lenovo – a market that is already declining. And EMC faces similar competitive pressures in the storage market from competitors old and new.

"This is a very risky undertaking because you have two companies that are struggling in their own markets and at the same time trying to enter new markets where essentially only VMware has a presence in," Gardner said.

"VMware has to be the point on the spear for any forward progress for both of these companies."

Dell's hybrid strategy gains an ally

Dell's focus on becoming the hardware supplier of the cloud makes sense, but the company needs to find ways to better facilitate enterprises use of hybrid cloud, said Michelle Bailey, an analyst and vice president of data center initiatives and digital infrastructure at 451 Research LLC in New York.

"They're behind, there's no doubt about it," she said, adding that Dell hired away Jim Ganthier from HP last year to help with its cloud strategy. Dell needs to form partnerships with the world's 25,000 cloud providers and become a systems integrator with tools such as Dell's Boomi instead of taking on Amazon Web Services and Microsoft Azure.

Enter VMware, which has struggled in the public cloud market.

VMware faces its own competitive headwinds, Gardner said, as it tries to enter new markets itself with its existing and upcoming hyper-converged infrastructure offerings, which have had little success, as well as a new open source initiative

Also, VMware's public cloud strategy has not worked out, favoring now a move toward hybrid cloud and software defined data centers (SDDC), Gardner said.  VMware can succeed in the hybrid cloud and SDDC markets but is up against the steel of the industry including IBM, Microsoft, Cisco, Oracle and HP, all of whom will not be preoccupied dealing with a one or two-year long transition of fully integrating its products with those of one of the largest IT suppliers in the industry, Gardner said.

"They are going to be so busy pulling all this together at a time when they need to dominate this hybrid cloud market," Gardner said. "These other players are not going to be encumbered by the burden of the largest merge in the history of technology."

The big question is whether Dell can continue to innovate after it takes on the combined $40 billion debt from the deal and spends time focusing on the integration of the two companies. For on-premises data centers, virtualization and the software-defined data center, the deal will bring the benefits of cloud computing, said CEO Michael Dell in a conference call.

Dell said he was looking forward to the combination of EMC's RSA Security LLC and Dell SecureWorks Inc. in the growing security market, plus the addition of VMware's enterprise mobility management product, AirWatch.

The tech industry has a long history of collaboration, Dell said, pointing to Dell's existing partnerships with Microsoft, Oracle Corp. and Red Hat, Inc., which he said will all continue.

Dell also said the new combined company won't strictly use virtualization software from VMware.

VMware has had a strong partnership with HP and Lenovo Group Ltd, said Pat Gelsinger, VMware's CEO.

Bailey, from 451, said it will be important for Dell and EMC to remain impartial on virtualization software and said VMware shouldn't do anything to make it harder for enterprise users to run VMware virtualization software on HP servers.

Expanding the VCE portfolio

EMC will continue its partnership with Cisco Systems, Inc. in privately-held VCE and it will continue to work with the broader ecosystem, company officials said.

A majority of VCE products are aimed at enterprises, particularly in industries such as telecommunications and financial organizations. . While Dell does have some products that perform similar functions to VCE's VBlock and other converged infrastructure, none are really aimed at the enterprise.

"There is probably less overlap there than one might think," King said. It would be wise for Dell to maintain and expand the VCE portfolio, he said.

The deal will give EMC stockholders $33.15 per share. VMware will stay a public company.

While Dell said jobs cuts are likely, he noted some other tech companies have seen much more significant cuts lately, such as the 30,000 job cuts that HP revealed last month. Dell said its new $30 billion enterprise data center business will be headquartered in Hopkinton, Mass. and the new combined business will have three hubs – Austin, Silicon Valley and Boston.

Robert Gates covers data centers, data center strategies, server technologies, converged and hyper-converged infrastructure and open source operating systems for SearchDataCenter. Follow him on Twitter @RBGatesTT or Email him at rgates@techtarget.com.

Ed Scannell is a senior executive editor with TechTarget. Contact him at escannell@techtarget.com

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