Dell, Wall Street, Magic Beans, and the End of EMC

As of today, EMC Corporation is no longer an independent company. Who thought we would see this day? From now on, EMC is simply a brand for parts of Dell’s Infrastructure Solutions and Services businesses. This marks a major shift in the enterprise storage world, for IT, and perhaps for American business in general.

Investors Are Happy with Magic Beans?

I have been skeptical about the Dell and EMC merger since the announcement. The price seemed too low, the included “tracking stock” too flimsy, and the questions about VMware, RSA, and other Dell and EMC businesses too great. The purported value of the deal ($33.15 per share) was based on a cash price of $24.05 per share of EMC plus 1/9 of a share in a tracking stock to value the company’s ownership of VMware. As discussed at the time, this offer dramatically under-values not just EMC itself but also its ownership stake in VMware, Pivotal, and the new SecureWorks company.

Essentially, Dell bought all the $28 EMC shares for $24 plus some magic beans.

But it seems that Wall Street was willing to go along with the deal to rid itself of EMC. There has long been a cloud hanging over the EMC’s enterprise value due to a perception that the traditional enterprise storage world is on the verge of massive disruption. Analysts and investors apparently do not believe that EMC can adapt to the new world of IT and maintain earnings and profitability. Investors appear to be willing to accept this compromise, letting EMC go to Dell to get it off their hands.

I’m betting the VMware tracking stock ($DVMT) will look pretty good for a while, rising to between $45 and $60 per share before collapsing for good. Why $45? That’s the difference between EMC’s share price the day before the merger ($29.05) and Dell’s cash ($24.05) times 9 (remember that each shareholder gets 1/9 of a share of $DVMT). Owners of $EMC shares will sell out somewhere in there and that will be that.

In the mean time, I also expect lots of “pump the price” stories to be published, suggesting that $DVMT is a good way to get shares of VMware on the cheap. But tracking shares have no intrinsic value and no voting power. Unless Dell adds a dividend to $DVMT, it’s likely to follow the trajectory of similar tracking stock offerings (and magic beans): Right down the drain.

The Future of Dell EMC is Brighter

But the Dell/EMC deal is fundamentally all about brushing aside Wall Street’s demands and focusing on corporate success. And that aspect of the deal is a whole lot more positive. Dell has handled the integration as well as could be hoped, and it is likely that the newly-formed Dell Infrastructure Solutions business (selling as Dell EMC and managed out of Hopkinton) has a strong few years ahead of it.

Although Dell has traditionally been a weak spender when it comes to R&D, EMC is awash in solid technologies. Just about every product line is competitive in its market segment and some (DSSD, ScaleIO) are trend-setters. Dell EMC ought to be able to make hay with these products, selling to traditional EMC buyers as well as Dell’s massive customer base. And now they have the Dell Enterprise Solutions products to push as well.

Certainly Dell EMC has too many product lines now, but the correction won’t hurt customers. One can only hope that management will have the wisdom to cut products based on long-term viability rather than short-term sales. EMC has been content to allow competitive product lines to continue until a clear winner emerges. Perhaps Dell will continue this practice, especially now that Wall Street isn’t watching as closely.

Personally, I remain concerned for my many friends inside this new company. Dell would be wise to be graceful and kind to employees, allowing them to move to other areas instead of letting them go. But many have already given notice, casting a cloud on the future of the company. Dell needs to retain these talented people.

Dell also needs more clearly to explain what happens with the other parts of the combined business. Security has a home, but what about Dell’s networking assets? I’m not really worried about VMware under this new management regime, but what was the deal with that SecureWorks transaction? There are so many questions and still not many answers.

Impact Beyond Dell

The biggest question is the impact of this combination on the rest of the industry. HP clearly doesn’t agree with the Dell “embiggening” strategy: They split into HP InkInc and HPE and seem to be doing well so far. But Cisco has yet to react.

Then there’s the changed acquisition landscape for all the startups in the industry. Dell and EMC aren’t going to be bidding on startups any time soon, and HPE and Oracle seem fairly sated right now. This leaves Cisco as the only hungry company at the buffet. I expect some feasting to be done, building a new full-line competitor for Dell and HPE!

We must also consider the new world of IT, with a resurgent Microsoft joining Amazon, Google, and the cloud providers in attacking the IT industry. This is the reason investors were willing to take Dell’s magic beans in the first place, and it’s the real deal. Many are saying that sales of enterprise IT products have peaked, leaving companies like Dell to fight it out in a narrowing ring.

But this transaction is also a vote of “no confidence” in Wall Street. Dell went private and has, by all accounts, done very well since. Many other companies are following suit. Clearly, corporate management is fed up with the quarterly mindset so prevalent among investors and analysts. Will we see fewer IPO’s, as management realizes that being a public company isn’t a positive for a growing company? Watch for Nutanix and SimpliVity IPO’s as bellweathers.

Stephen’s Stance

EMC’s management clearly knew that it was time to make a move, and were willing to take a little less for the company than folks like me thought. Dell management clearly thought they could leverage EMC to solidify their position at the top of the IT market, and I bet they’ll do a good job with it at least for a while. Investors clearly are happy to take what they got (some cash and some magic beans), and who am I to question their logic? As for me, I’m just sad to see one more pillar of the enterprise storage industry wiped away.