At first glance, Dell - which was taken private several years ago with a valuation of ≈$25 billion - is a guppy compared to EMC's $50 billion valuation. But looks can be deceiving.
Some $35 billion of EMC's market cap is due to VMware, the leader in virtualization software. Activist shareholder Elliott Management Corp. has been pressing EMC to spin off the 90 percent of VMware it owns. VMware's steady growth has bolstered EMC earnings as EMC's core storage business has stagnated.
Longtime EMC CEO Joe Tucci - a very savvy exec - is due to retire, so the pressure is on for a big strategic move. EMC was reported to be in talks with HP last year, but HP's troubles and its split into two companies torpedoed the deal. Likewise, these talks with Dell could go nowhere.
Michael Dell has made several storage buys over the last few years - Compellent, EqualLogic, Ocarina, Exanet - but none has had the scale Dell needs to move the needle. Dell's "stack 'em high, sell 'em cheap" culture has been at odds with storage buyer's traditional focus on availability, performance and support.
EMC has the best storage sales force in the industry and the R&D depth needed to make Dell a power in one of the few remaining high-margin businesses in IT. Dell sells lots of low-margin servers, but storage is where the dollars are - or were.
The consolidation tango
The larger picture: the enterprise IT market has slowed due to the rapid growth of cloud services. It's not enough to dominate networking, or servers, or storage - all are slowing down - so consolidation is the order of the day.
Since servers are a low margin business, the obvious move is into high-margin networking, services and storage. HP moving into networking; Cisco into storage; IBM into services; and, now, Dell into storage.
But who buys whom, and why? IBM is slowly leaving the hardware market. HP is retrenching. Cisco's UCS is moving into storage and servers, but too slowly. Dell needs to move upmarket, and is struggling.
Cloud is the secular driver. Web scale is so much more economical than traditional enterprise kit that the difference is hard to justify. VMware taught enterprises that most apps aren't resource intensive; cloud vendors are grabbing those first.
The Storage Bits take
EMC's Tucci has been shopping EMC for over a year for good reason: their core enterprise storage market is shrinking. Their Atmos and Pivotal cloud plays aren't big enough to drive EMC's $25 billion dollar revenue at the growth rates Wall Street expects.
Combining with EMC could be very good for Dell, which lacks the enteprise cred of IBM, HP, Cisco, Oracle and EMC. EMC's sales, marketing and engineering expertise would give Dell a strong foundation for future growth.
But today's EMC would be dismembered. VMware would be spun off, as it should have been years ago, while the cloud businesses should be taken private by deep-pocketed investors. Dell would get EMC's VMAX, VNX, DSSD, Isilon, XtremIO and DataDomain products, all viable but as a group unlikely to show high growth.
A slow-growth market that values service and efficiency plays to EMC's and Dell's strengths. The combination will make enterprise infrastructure more affordable for all.
Comments welcome. Datacenter readers: what do you think?