Rumors became reality yesterday when Dell announced it is planning to acquire EMC and take it private. It’s an excessively expensive deal that includes Dell taking on an additional $40 billion + in debt to their existing $11 or $12 billion and establishing a strange new security for VMware known as a tracking stock. Dell’s annual interest rate on this debt is estimated in the 6% – 7% range. If the total amount borrowed is between $40B and $50B, the annual interest payments will probably be between $2.4B and $3.5B. Whatever the final tally is, it’s not going to be chump change.
While financial analysts seem to think that $50 billion in debt is not that big a deal, enterprise storage buyers will. The most important factor in EMC’s sales has been their predictable trajectory, which is now entering turbulent air. The FUD that EMC has used so liberally for decades against competitors like Tegile will now work against them. EMC customers are already wondering about the future of their EMC products in light of Dell’s need to pay down that enormous debt. EqualLogic and Compellent customers saw what happened to those products after being acquired by Dell and their confidence in EMC as part of Dell will be lessened considerably.
All this was unthinkable a week ago.
With EMC’s destabilization, customers who have long resented their sales tactics will gladly give the business to Tegile, Pure, Nimble and others. The desire of customers to stick it to EMC is a large part of the success that flash storage newcomers have had against EMC and there will be payback extracted for EMC’s sales’ sins of the past. If the “EMC backlash” mentality becomes a theme among storage buyers, the decline of sales of EMC products could be a very unpleasant surprise to Dell’s debt holders.
All this before the acquisition closes and the real trouble begins.
Any time two large companies merge, there is violent turmoil sorting out who is responsible for what, how key decisions are made, how budgeting is done, which products are funded, how employees are paid, who stays, who goes and all things related to people doing their jobs. This is never straightforward, creates rancor and takes years to resolve, creating problems for customers along the way. It’s already difficult enough keeping a customer focus in a large political organization, but it’s impossible when managers are grabbing for every person and position of power they can lay their hands on. After all, we’re talking about EMC and Dell here.
EMC can try as hard as they want to position this merger as customer driven, but it clearly is not. It is financial maneuvering, pure and simple, and will likely result in longer product cycles, less R&D spending, more expensive product maintenance and reduced customer service levels.
With such a heavy debt load, Dell is going to have difficulty retaining top EMC talent with golden handcuffs. Some will be happy working for Dell, but many will want to try something else, feeling that their compensation and career options are not what they once were or not liking Dell’s way of doing things. There are a lot of ex-EMC people working elsewhere in the industry and the industry can absorb many more of them. New companies can give them stock options that Dell won’t be able to match.
One of our biggest challenges at Tegile is differentiating our products in a crowded market with established leaders. It is not quite enough to have excellent technology, stable growth and a responsible burn rate – you also need a little luck. We need our competitors to screw up from time to time so we can take advantage of their missteps. Dell’s acquisition of EMC is the mother lode of luck for Tegile. We are ready, willing and able to step up to this incredible gift that will keep on giving for several years.