A16Z Partner Peter Levine, Co-founder/CEO of Cumulus JR Rivers, and Founder/CEO of Actifio Ash Ashutosh, discuss Dell's $67 billion merger/acquisition of EMC, the largest tech M&A deal ever, with A16Z host Michael Copeland.
What does Dell need and what does EMC get them?
According to Levine, Dell is looking to shift their business from the declining PC market into enterprise IT, and this cements that move. Dell's core competency is developing servers for enterprise, and the missing part of the plan was the storage piece, which EMC solves. Dell is moving from server vendor to systems vendor—merging servers, storage, and networking.
Rivers notes that Dell was dancing around moving into storage and EMC was dancing around servers—both parties have been dancing around each other for a long time. Additionally, Dell gets EMC's well-vetted enterprise sales force, of which there are very few.
Are these companies "dancing at the right party"? How does the datacenter landscape shift going forward?
Levine argues that the proverbial "puck" in the data center world is moving towards architectures like Facebook, Google, and Amazon's, and less like "Wall Street datacenters" (Cisco, EMC, Oracle databases, Sun Microsystems servers—the blueprint 10-15 years ago). In the new environment, the incumbent hardware (Cisco, EMC, Dell, HP) is not really there. While companies are still spending a lot in this area, many are moving to "hyper-scale deployments," where the hardware is a commodity and software is more important. Dell and EMC need to reckon with this future.
Rivers notes that while the highest-achieving companies (Google, Amazon) want to build their own infrastructure, companies "one step down" want it to feel like they built their own, with the same architecture. Dell aspires to satisfy that need, and EMC can provide infrastructure hardware in "vBlocks," which are data center racks with integrated storage and provisioning from EMC, switches and servers from Cisco, and VMware virtualization software running on the servers.
Ashutosh points out that there's a divergence in the IT world, exemplified by two conferences that happened last week. In Las Vegas, Amazon AWS re:Invent hosted "a bunch of anarchists asking for freedom from operations," meaning those who prefer not to deal with infrastructure, but prefer to buy it on-demand from Amazon.
The exact same week, in Orlando, a Gartner event hosted 8,500 CIOs, "wringing their hands." The CIOs need to respond to the fact that their customers need AWS-level capabilities (speed, APIs, platforms), which means infrastructure is even further a commodity. Given the shift to commoditized hardware with rapidly-evolving software, in order to succeed, Dell-EMC "has to be the biggest Wal-Mart around"—it cannot be a boutique selling commodity product, but rather must be the retail king.
How fast is the datacenter "puck" moving? The CIOs spend a lot, and it's not going to shift overnight.
Rivers argues that convergence is coming, but not soon, and Ashutosh agrees that hybridization is the name of the game today. Vendors are putting infrastructure on sale, and CIOs are taking it (from AWS, Azure in particular, and IBM). It's a buyer's market—everyone's giving free infrastructure for 2 years, and CIOs are taking that time to plan.
Levine predicts that while the data center of the near-term is a hybrid between private data centers and "public" cloud storage, the architecture will still look like Facebook/Amazon/public cloud. The data center may be on-premise or hosted somewhere, but architecturally, the system is new. Commoditized hardware and sophisticated software are the essence.
Is the merger a good idea?
Rivers points out some of the underlying financial realities—hardware is a commodity, so Dell-EMC plan to excel on distribution (with their enterprise salesforce and the beachhead of VMWare). Given that EMC owns VMWare, which would be worth at least $40 billion on its own, Dell only "really" paid $20 billion to do so.
Ashtosh says it's a win-win-win. Customers win, as they can get best prices from big player. EMC wins, because they were cresting (they had nowhere else to grow). Dell wins, because they can come back and be a megastore, not a boutique.
Levine brings us to our next topic: did EMC have to do this deal because of activist shareholders? You could imagine them buying other companies in their ecosystem and becoming "Dell-EMC", without the Dell. In this case the python (Dell) is eating the cow (EMC). It's an upside-down acquisition.
How do activist shareholders play into this? Public markets?
Levine argues activists limited EMC's optionality. While activists claim to be representing shareholder interests, they are short-term focused, and are generally in favor of selling companies, and returning cash to shareholders. (Good) management has a longer-term view, and generally wants to invest in R&D, M&A.
EMC did one of the best enterprise acquisitions ever when they bought VMWare, which would not have happened with activist board members, because of their limited appetite for risk. Innovation is risky, activists are limiting that risk. Dell was able to do this deal because they were private, while EMC had to do it because of activists. Large companies have very little optionality, so what's the point of being public?
Rivers piles on: public markets are great when you're growing, but if a shareholder owns 7%, they can't sell all of that at once, so the only way to make money is through sale or privatization. With as much cash as EMC was generating, Dell can "normalize operations," increase cash flow, and make out (in a profit sense).
Ashutosh raises the point that CIOs might be spooked by this acquisition—if EMC can be acquired, who can't? Can they depend on anyone's products not to be cancelled or changed drastically?
So who is vulnerable to acquisition or failure?
All the interviewees fail to address this head on. Rivers predicts a more "casual" relationship between buyers and suppliers. While Google-style infrastructure (the new normal) is re-invented every two years, (the old normal) "Wall Street"-style infrastructure was added to gradually. Enterprises will now have to work more incrementally/flexibly.
Ashutosh points out that the rise of platforms, APIs, open standards, and open source are becoming one of the critical parts of enterprise strategy, as their ownerless nature makes them more reliable. For example, Git and NoSQL cannot be acquired. They are the new IT, and infrastructure is just a supporter.
Mergers have a long history of not working. What can go wrong?
Many things! Levine brings up the analogy of "the collision of two garbage trucks, with crap everywhere." A merger's success is not about the technology, but because the go-to-market and sales organizations are muddled.
Dell is good at selling commodity components, and EMC is good at selling high-margin components. An EMC sales rep might not enjoy selling a Dell server for a low commission. A Dell telesales person selling a complex EMC storage device may not understand its complexity, or be able to provide adequate customer support.
On the positive side, Rivers notes that EMC sells highly-engineered systems in which they can now integrate Dell commodity components, so that the systems can be more cost-effective. Dell's salesforce can sell the same components into a different market, so the total market for the components will be vastly expanded. Additionally, EMC is tremendously profitable ($6 billion last year), and the merger to a private company gives them time to figure it out.
Levine notes that cultural fit, engineering and sales might not be able to be combined effectively, even with infinite time (Symantec and Veritas are a salient example), it doesn't always work. Given that it's the largest tech merger ever, everyone will look back on it as the smartest or the dumbest M&A of all time. We'll see!