On Monday morning the technology world woke to the news that Dell Inc. had signed a definitive agreement to buy EMC Corp for about $67 billion in the largest technology acquisition ever. As part of the purchase, EMC shareholders will receive $24.05 per share in cash in addition to tracking stock that is linked to a portion of EMC’s stake in the VMware business. The transaction is expected to close in the second or third quarter of Dell’s fiscal year ending Feb. 3, 2017 (within the months of May to October 2016).
The combination of Dell and EMC will create one of the world’s largest privately controlled, integrated technology companies. The resulting unified entity will vie in an extremely competitive as well as fast-changing enterprise IT and cloud market, with Dell and EMC able to offer complementary product portfolios, sales teams, and R&D investment strategies.
Both firms have leadership positions in servers, storage, virtualization, and PCs. Craig Stice, IHS principal analyst for compute electronics and servers, says a combined Dell and EMC will have "one of the most complete and unified portfolios, which should provide them additional reach into larger business opportunities that they may have not have had access to as individual companies." Stice also believes the newly merged giant will allow it to better compete against the likes of IBM, HP, and Cisco amid the growing trend of unified IT solutions.
I agree. EMC is clearly the technology leader in storage solutions for the high-end enterprise market, a space of tremendous interest to Dell. While Dell is one of the top three suppliers of servers to the enterprise market, it has traditionally been weak in the high-end server landscape, which has been dominated by HP and IBM. Conversely, Dell’s strength in the midrange enterprise market gives EMC a viable entry point for its storage solutions into this segment of the market.
While Dell’s strategy is to drive large-volume business with the acquisition, the crown jewel in this transaction is, obviously, VM Ware. EMC holds an 81% stake in VM Ware, with the remainder being publicly traded. Dell’s purchase of EMC gives it a controlling stake in VM Ware, which is the market leader in ‘virtualization’ technology. Virtualization is gaining explosive traction in data centers, providing software solutions that can replicate virtual servers within a physical server. Microsoft and Citrix are the other strong players in virtualization segment, and it will be interesting to note how Dell will take on VM Ware in balancing its now-combined hardware and virtualization markets.
To be sure, server virtualization is a transformative technology in enterprise and hyper scale datacenters. While in traditional operational models, servers rarely operate at their optimum capacity—in fact, 90% of the time server hardware is idle—virtualization has allowed datacenters to match server computing capacity to load. In essence virtualization allows a single hardware server to be segmented into multiple to separate servers at a software level, enabling enterprises to access additional ‘virtual’ resources. This process has helped datacenters optimize their server hardware to achieve higher efficiency.
Virtualization adoption is still young—estimated in the 40% range in large enterprise markets and over 70% in cloud datacenters. With server hardware demand and the need for servers projected to remain strong, growth in virtualization software is also expected to keep pace, said Arun Suresh, Seerver Analyst at IHS Technology.
The timing of this transaction is particularly interesting, considering the changes that are happening to the leader in the server market, namely HP, which will split this November into two entities: HP Inc., handling the PC business; and Hewlett Packard Enterprise), handling the server business. Dell has timed the tech deal just right to capitalize on this market change, and both HP and Dell are now the top contenders in the enterprise IT hardware space, holding down the top two positions.
Overall, the server industry has experienced modest healthy growth in terms of unit shipments over the last two years. However, while the enterprise market has historically driven the server market, a large part of the recent growth can be attributed to the explosive expansion of the cloud and collocated datacenters. This, in turn, has caused a new breed of servers to emerge, in order to cater to the evolved customer requirement.
This transition has already had its impact on the competitive landscape for servers. Traditionally, the server market has been led by just three big original equipment manufacturers (OEM): HP, Dell, and IBM. It was an exclusive group, and the barrier to entry was great. As late as 2007, these three controlled nearly 70% of the total worldwide server market. However, demand generated by the massive datacenters has brought on a server industry model where the big three name-brand server vendors are now being threatened by non-branded and low-cost but customized white-box server manufacturers eager and able to meet datacenter requirements. This has essentially commoditized the server market—very different from years past. IHS shows that the “other” category, where the white-box market belongs, claimed over 40% total market share and enjoyed a 16% year-over-year shipment improvement. IHS also estimates the white-box market accounted for roughly 13% of the total server business.
The challenge, of course, to the top branded OEMs is whether they can compete with the white-box market. In July 2014, HP and Foxconn (a leader in Electronics Manufacturing Service or EMS) announced a joint-venture agreement to launch a new line of cloud-optimized servers specifically targeting large datacenter service providers. IHS provides detailed coverage of various element of the server market through its Compute Intelligence Service.
The acquisition of EMC and VM Ware by Dell is a strategy that appears to position Dell to compete well in this space. Both companies are considerable in size, and both enjoy extensive product portfolios. Integrating these portfolios will likely require change and some amount of scaling back to prevent duplication.
Ultimately, this tech deal has succeeded in creating an information technology behemoth with both the potential and capability to dominate the market. A combined Dell and EMC will possess a significant market hold in the storage, server, and virtualization sectors, and the new titan could be a game-changer as well in in the software-defined datacenter (SDDC) space.
Jagdish Rebello Phd is a senior director for IHS
Posted on 14 October 2015