EMC mergers ahead: First VMware, then HP Enterprise. Will time run out?

EMC and VMware are reportedly pondering ways to get back together. Such a deal would cost the combined entity time as the enterprise market transforms and may only lead to a HP Enterprise merger.

EMC has created a federation structure with VMware, the virtualization giant, and Pivotal, a big data play, and reports indicate that the storage company is looking to put Humpty Dumpty back together. While some merger---EMC buying majority owned VMware or vice versa---makes sense the biggest risk is the time it will take to integrate the companies.

And the enterprise industry may be moving too fast for EMC to take the time to integrate its various offspring.

Re/code reported this week that EMC's board is pondering several options and one of them was to have VMware buy EMC. The other option would be EMC buying VMware. In either case, the rationale for a deal is sound. Consider:

  1. It's difficult to pitch a federation of companies (VMware, EMC, Pivotal and VCE) as an integrated buy for enterprises. Meanwhile, the end game is infrastructure as a service. VMware and EMC predominately sell software and hardware, respectively, the old fashioned way.
  2. EMC has to transition its model to the cloud. EMC bought Virtustream and acquired a way to build an infrastructure cloud. But that deal, which on paper rhymes with IBM's purchase of SoftLayer, will take time to play out. Meanwhile, VMware enables cloud, but doesn't have much of an as-a-service play either. By combining forces, EMC and VMware would be better equipped to save money on central functions, cook up a better go-to-market story and transition the business.
  3. There are real cost savings to be had. Wells Fargo analyst Maynard Um estimates that the combined companies could save $850 million in annual costs.

The EMC federation has a cloud strategy that looks like this:

emc-federation-cloud.png

Here's the problem. The enterprise is going cloud quickly. Perhaps too quickly for EMC and VMware to become a well-oiled integrated machine. Rivals would pounce on the distraction with fear uncertainty and doubt.

In addition, VMware's independence could be called into question. That issue is a huge one. Many VMware and EMC partners---Cisco, NetApp, Red Hat and others to name a few---are also rivals. Coopetition with a merged VMware and EMC would soar. It's also likely that EMC and VMware salespeople could compete. Toss in employee defections in a merged entity and things could get messy.

Meanwhile, EMC would have to prune its businesses even as it merged with VMware. Documentum, RSA and Pivotal could all be spun off and sold.

Via Virtustream, EMC lays as-a-service cloud foundation | VMware names new CTO amid executive churn | EMC cuts 2015 outlook, says customers wary

I don't doubt that EMC has to do something. Um noted in a recent research note:

The large OEMs (original equipment manufacturers) such as IBM, HP, Oracle, and Dell have become more competitive by building/acquiring broader capabilities across the stack and offering complete converged solutions based on their own technology. Coopetition is turning into increased competition - to us, the friction is fairly evident and we expect this to continue to grow.

In the end, the EMC-VMware-Pivotal reunification may just be a precursor to something bigger. EMC and HP Enterprise are likely to merge at some point. Recall that HP's breakup plans not-so-coincidently were announced following reports of EMC merger talks. Bottom line: HP as constructed was too big to swallow.

Rajesh Ghai, an analyst at Macquarie, said the HP-EMC deal is the combination that may be able to keep up with a changing industry and do battle with the likes of Cisco, Dell and IBM on the converged infrastructure front.

Due to tax considerations and regulations, HP couldn't combine with EMC until May 2016, said Ghai. But the odds of a deal happening are high. "We continue to see the likelihood of a transformative merger of EMC with another large system vendor such as HP Enterprise as high," said Ghai in a research note. He added:

We believe HP Enterprise will be a lot more aligned with the current EMC and VMware businesses in terms of end-market focus and selling motions, which will enable the revenue and cost synergies across the two organizations to be a lot more apparent than HP in its current form. We also believe the worsening secular backdrop and the trends towards software-defined architectures and public/hybrid cloud may also compel the two parties to do a deal.

If we play the EMC possibilities out we're talking more than two years of integration. EMC and VMware would combine. Then that combined entity would merge with HP Enterprise. Two years from now the tech industry will be in an even different place. The as-a-service cloud assets from EMC, VMware and HP combined would have trouble denting any of the big guns such as Amazon Web Services, Google, Microsoft and IBM that won't have the integration distractions.