© FT Graphic / Getty

When Dell closes its $63.4bn purchase of EMC next Wednesday, it will coincide almost to the day with the 15th anniversary of the last attempt to build a giant IT conglomerate through acquisition: Hewlett-Packard’s offer for PC maker Compaq Computer.

HP’s deal, uniting a pair of computer hardware makers facing relentless pressure on profits margins, was likened at the time to “two garbage trucks colliding” by the head of rival Sun Microsystems.

Speaking privately, the CEO of one of Dell’s biggest rivals argues the same analogy should be applied to the EMC purchase. It is the tech industry’s largest-ever deal and will combine companies whose revenues predominantly come from hardware.

Michael Dell, unsurprisingly, does not see it that way. “It’s pretty different than that,” is the muted retort from the famously taciturn tech leader. He makes no secret of how much he has enjoyed working out of the public gaze since taking his eponymous PC maker private three years ago.

HP’s gamble on Compaq ultimately failed — the diversified IT company has been engaged in a progressive break-up over the past year. “For every action, there are reactions,” is Mr Dell’s guarded verdict on that reversal of course.

But, speaking to the Financial Times this week after the setting of the closing date of the EMC purchase, he clearly believes that his own company’s course better reflects the tide of tech history: “I wouldn’t be surprised if there is more consolidation.”

Chart: Dell data

It is a typically understated comment, given the potential impact on the rest of the market if the EMC deal succeeds. With sales of traditional IT equipment falling as customers shift more of their tech spending to cloud computing, Dell is trying to compensate. It plans to drive hardware costs down through massive scale, grab a bigger share of the shrinking market, and use the reach of its salesforce to colonise more parts of the IT markets — all things that would intensify the pressure on rivals.

Dell’s traditional strengths in supply management will be important to its efforts to squeeze costs on a wider range of tech equipment, says Pat Gelsinger, chief executive of VMware, the data centre technology company that will come under Dell’s control as part of the deal. 

“The supply chain is huge here,” he says. “Dell has mastered supply chain. Those kinds of thing have meaningful benefits today and for competitiveness in the long term.”

Top five tech deals
DateTargetAcquirerValue
Oct 2015EMCDell$63bn
Jul 2015PayPalShareholders$49.2bn
May 2015BroadcomAvago Technologies$36.6bn
Mar 1999Agilent TechnologiesShareholders$30bn
Sep 2001Compaq ComputerHewlett-Packard$25bn
Source: Dealogic

Mr Dell also argues that taking EMC private will give him the ability to swallow losses in the short term, as he builds a stronger long-term position. He claims Dell has gained PC market share in each of the past 14 quarters since returning to private hands, for instance — something he says would never have happened as a public company, given Wall Street's profit expectations.

“The persistence of being able to invest with a long-term time horizon has proven itself,” he says.

But to escape the fate of the colliding garbage trucks, Dell will have to do more than just show it can manage declining markets better than struggling rivals.

Chart: Dell data

Sharp cultural differences between the companies will create management challenges from the integration, says Glenn O’Donnell, a research director at Forrester Research and himself a former EMC employee. Given the enlarged company’s scale, he asks: “Will it be the quintessential stodgy giant? It’s a possibility” — though he credits Dell with showing greater product innovation since it went private in 2013.

Most important, Mr Dell will have to position his company to catch the next wave of technology, while producing the cash flow needed to pay down a debt mountain of nearly $50bn taken on with the EMC acquisition.

“We see plenty of opportunities, even in a consolidating market,” he says. “I think the market’s changing — with the explosion in the number of devices, with the cost of making things intelligent approaching zero. You have the ‘internet of things’ that’s expanding the number of devices that are creating data.”

Chart: Dell data

The new tech market emerging from trends like these will demand products and capabilities far removed from the PC, server and storage hardware products that have accounted for the bulk of Dell and EMC sales.

For instance, combining cloud technologies with existing IT infrastructure has given rise to a new generation of so-called “converged hardware” — appliances that can operate as part of a more intelligent network to handle computing, storage and networking, rather than just act as standalone boxes.

According to Sophia Vargas, an analyst at Forrester, Dell has a more coherent product story to tell in this new market than HP, which has failed to do as well in overcoming the fragmentation between the underlying technologies.

One key to Dell’s ambitions is VMware, whose software is widely used to bring some of the efficiencies of cloud computing to existing corporate data centres. EMC’s 80 per cent stake in the company represents roughly half of the acquisition’s value.

It will require a careful balancing act. Boosting revenue by packaging VMware’s software with more Dell hardware is one of the goals of the acquisition — though that could alienate other hardware makers that have an alliance with VMware, among them HP. The new rivalry may prompt HP to look for alternative software suppliers, says Mr O'Donnell — just one of a series of deeper rivalries that might be triggered by the acquisition.

Mr Dell’s response: “It would be not in our economic interests to do anything to erode the open ecosystem that VMware has. That’s pretty simple.”

In an attempt to show it will operate at arm's length from its new parent, VMware used its annual customer event in Las Vegas this week to announce a new partnership with IBM. Also, playing on its neutrality as a supporter of technology from multiple suppliers, it unveiled a new product to help customers manage computing workloads running on the cloud platforms of a number of big tech companies.

Chart: Dell data

Cloud platforms like those run by Amazon and Microsoft are increasingly becoming “silos”, says Ms Vargas: “The next wave is going to be designing a system that uses all of them seamlessly.” VMware itself once hoped to become a large cloud player, but the new product, called Cloud Foundation, suggests it is trying to make a virtue of its lack of headway in this market to become a more neutral integrator of rival platforms.

Mr Dell shrugs off questions about whether this new landscape of shifting alliances and intensifying rivalries will pose a challenge for the IT conglomerate he is building. Such overlapping friendships and enmities are not new, even if they are becoming more intense.

But it is clear that, whatever the talk of partnerships, he believes the creation of a giant private IT company has just put him at a clear advantage to much of the competition.

“Financially, we have an advantaged capital structure that allows us to focus on the long term,” he says. Other IT companies, struggling to remake their business under the full gaze of Wall Street, may come to envy him that luxury.

Get alerts on Dell Technologies Inc when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article