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Dell and EMC: A big buyout, but will scale pay off vs. hyperscale cloud?

Dell and EMC would merge in what would be one of the largest leveraged buyouts. Strategically, the deal makes sense, but there's a catch. Dell and EMC still lack a public cloud story in a hybrid market.

Dell is reportedly planning to offer more than $27 a share for EMC in what would be a massive leveraged buyout.

According to CNBC, the deal would be about a week away and Dell has to line up $40 billion in financing. The general idea is that Dell would buy EMC and keep control in VMware.

The Wall Street Journal first reported that EMC and Dell were doing a merger dance.

EMC has been evaluating strategic alternatives and looking at everything from a reverse merger where VMware, which is majority owned by the storage giant, could buy EMC, to bringing VMware in-house.

Previously: Dell buying giant EMC - or vice versa? | Dell, EMC talking about possible merger deal: Report

The rationale for the EMC-Dell combination is straightforward:

  • The companies would have more scale and be able to play in nearly every aspect of the data center.
  • Dell would get real software assets via ownership of VMware and EMC's capabilities.
  • The combined companies would have a better converged infrastructure story since EMC also has VNX.
  • Both companies could cobble together a decent services organization to better sell hardware and software bundles.

Of course, there's a catch. The combined EMC-Dell would be massive yet lack a public cloud story. EMC and Dell would be all about building private clouds and hybrid architecture. The big hole EMC and Dell would have is a public cloud to combine the private infrastructure. IBM has SoftLayer.

In other words, EMC and Dell could combine in one of the largest leveraged buyouts ever and still be run over by hyperscale cloud providers such as Amazon Web Services and Microsoft and lack the hybrid play that IBM touts. HP Enterprise would aim to pounce on the fear, uncertainty and doubt surrounding a Dell-EMC merger. Much of that FUD would revolve around the combined EMC-Dell's ability to fund innovation with what will be a heavy debt load.

The EMC-Dell situation is fluid and there are multiple options that could be in play. Credit Suisse analyst Kulbinder Garcha said in a research note:

We believe there are many avenues for Dell to pursue (financing permitting). 1) Dell could buy the whole of EMC, which, given EMC's market cap of about $50bn, would be a large transaction. 2) Dell could acquire EMC and spinoff one of the assets. 3) Dell could buy just the storage asset of EMC, EMC II, essentially breaking up the federation.

Dell went private to transform from a reliance on PC to more soup-to-nuts infrastructure, services and software. Financially, the time is right for Dell to ponder a leveraged buyout due to low interest rates. What's unclear is whether Wall Street has the appetite to fund a leveraged buyout that large at a low rate.

It wouldn't be crazy to Cisco to ponder an EMC purchase too. EMC with VMware would be a strong asset for most of the IT megavendors.

Should Dell pull off an EMC merger, it's clear that the IT vendor landscape would shift. HP Enterprise, which is about to split from its PC and printer sibling, is downsizing to be more nimble. EMC and Dell would go in the opposite direction.

Jefferies analyst James Kisner noted the scale from EMC and Dell would likely mean more consolidation.

We see increased scale as the main benefit from a combination. Dell and EMC are increasingly competing with the likes of Amazon, Google, Microsoft, and others that have deep pockets; becoming larger would make Dell and EMC of greater strategic importance to their customers. Secondly, a combination would allow Dell+EMC to provide a more compete private cloud stack. While Dell is not as significant a player in networking as HP Enterprise, Dell's server position and software could prove useful (servers could be used in hyper converged appliances, for example). We believe enterprise customers want their private cloud vendors to be able to provide an easily integrated and scalable private cloud stack that ideally is also interoperable with other vendors' stacks. This combination would at least increase EMC's breadth.