On October 12 Dell said it will pay US$67 billion for EMC. It is the biggest technology deal ever and the latest in a never-ending wave of mergers and acquisitions.
Dell may pay too much for EMC. The offer is more than twice the total equity and about 50 per cent higher than the value of EMC’s assets. Acquiring companies often overbid to see off rivals.
Most observers expect Dell to sell unwanted parts of EMC when the deal completes. This will lower the final acquisition cost.
The elusive benefits of tech consolidation
Big technology mergers rarely succeed. Few have been a resounding success.
Expect managers to prattle on about synergy as if they know what they are talking about. They rarely do. In most cases the movers behind takeovers are lucky if the new organisation is worth as much as the sum of the parts. Often big tech mergers destroy value.
There is a long list of disappointments. Oracle’s Sun Microsystems acquisition saw a huge destruction of value. At the time there was a lot of talk of synergy.
Then there is HP. It binged on Compaq, EDS and Autonomy — all, allegedly, bringing synergy. There’s little evidence of that.
Maybe that experience prompted HP boss, Meg Whitman, to point out the integration challenges Dell face.. She should know, her predecessors left her a mess.
Dell’s debt risk
Dell faces another risk. It needs to take on a huge debt for the acquisition. Dell has a track record of paying-down debt. It has already paid back the cost of its 2013 buy-out.
EMC’s shareholders get a profitable exit just as the future starts to look uncertain.
Its operating income last year was US$4 billion, net income was US$2.7 billion. Although debt is cheap at the moment, paying the interest will still be a challenge.
Cisco shareholders must be praying someone else with deep pockets is thinking of a similar move.
Dell’s EMC buy underlines how cloud computing has hurt enterprise technology companies.
Cloud is the biggest change since networks of small computers replaced mainframes in the early 1990s. Unlike the earlier waves of creative destruction this isn’t about replacing a hardware generation. It’s about the move from hardware to services.
EMC has a toehold in the data centre business. It sells storage hardware and virtualisation software to help spread loads between servers. This is a company that until recently had double-digit growth. Today EMC is growing at a slower pace.
Dell diversifies with EMC
Dell has moved into corporate computing. It has made big strides with storage and servers. Yet it still depends on PCs for most of its income. That market is in free-fall.
The server business is no better. Only IBM and SAP have much in the way of mainframe business. Players like Unisys are now consigned to mainframe niches. And that sector is unlikely to grow.
The smaller servers that have dominated business computing for the last twenty years are also on the way out.
While the shift to cloud computing threatens Dell and EMC, it also threatens all the other business technology giants of the last 25 years.
Microsoft is an exception. It got into the cloud ahead of the trend and is now the main competitor to AWS which came from nowhere to dominate enterprise computing.
Away from the cloud, hardware makers now churn out basic, commodity computers which can be programmed to act as servers, routers or storage devices. Hence software-defined networking, software-defined storage and even software-defined data centres.
This trend also reduces the once valuable integration revenue — everything plays together better now.
Dell’s strength lies in building low-cost, undifferentiated hardware. But even its commodity computers are too expensive for the big cloud companies who build their own kit or outsource the job to white-box contractors.
Now Dell is banking on selling low-cost hardware to enterprises so they can build thier own private clouds. It may also hope to juggle the economics of building commodity hardware to win back business from the cloud companies.
Many commentators view the deal as a sign of the triumph of new cloud players over old enterprise technology companies.
There is something in this, but it’s not straightforward. All the old companies have made huge investments in cloud technology. They just haven’t moved fast enough, or confidently enough towards the new way of running technology.
Unlike AWS, they face a problem, if they race too fast to the cloud they’ll replace their existing high margin business with a low margin alternative. Only Microsoft has avoided this fate.
Which brings us back to Dell buying EMC. It isn’t a triumph or a new beginning, the deal is a step in the death throes of an era. What we are seeing is the twilight of the technology gods.
- Once a takeover is in play, it can often be just as important, maybe more important, to keep the target out of a rival’s hands. Much of this is just something that goes on inside a manager’s heads. Few large scale acquisitions end up causing serious damage to rivals.