Dell Inc has created quite a buzz by announcing its decision to acquire data storage giant EMC Corporation (EMC – Analyst Report) in a record $67 billion deal. It is the biggest tech deal ever signed.
Speculations about a combination between Dell and EMC first surfaced in Sep 2014. EMC's management had been under pressure from activist hedge fund Elliot Management, which is one of its five biggest shareholders (2% stake), to review strategic options due to continued weak results at the core storage business. The core data storage business has been struggling due to growing competition from flash storage providers such as Nimble Storage, Inc., SanDisk Corp, and Western Digital. Elliott Management had demanded that EMC spin off VMware, Inc. (VMW – Snapshot Report), in which it has an 80% controlling stake.
Coming to the terms of the deal, EMC shareholders will receive $24.05 per share in cash along with tracking stock related to a portion of EMC's economic interest in VMware. Based on EMC's estimated outstanding shares at the close of the transaction, stockholders will get 0.111 shares of the new tracking stock for each EMC share.
The buyout will be funded through new equity from Michael Dell, MSD Partners, private equity firm Silver Lake and Temasek Holdings along with the issuance of tracking stock, new debt and cash. The deal comes two years after Dell was taken private by its founder Michael Dell and Silver Lake in a $25 billion leveraged buyout. The Dell-EMC deal remains subject to approval from regulatory authorities as well as EMC stockholders.
Key Takeaways from the Alliance
The combination of Dell and EMC will create the world's largest privately-controlled, integrated technology company. Dell's intent behind this acquisition is to become a key player in the cloud services and data storage market to compete with the likes of Amazon (AMZN – Analyst Report), Apple (AAPL – Analyst Report), and Alphabet Inc. (GOOGL – Analyst Report).
EMC Corporation (stylized as EMC²) offers data storage, information security, virtualization, analytics, cloud computing and other products and services that enable businesses to store, manage, protect, and analyze data. VMware is the subsidiary that focuses on cloud and virtualization software and services for its parent company.
“The combination of Dell and EMC creates an enterprise solutions powerhouse bringing our customers industry leading innovation across their entire technology environment. Our new company will be exceptionally well-positioned for growth in the most strategic areas of next generation IT including digital transformation, software-defined data center, converged infrastructure, hybrid cloud, mobile and security,” said Michael Dell. “Our investments in R&D and innovation along with our privately-controlled structure will give us unmatched scale, strength and flexibility, deepening our relationships with customers of all sizes. I am incredibly excited to partner with the EMC, VMware, Pivotal, VCE, RSA and Virtustream teams and am personally committed to the success of our new company, our customers and partners.”
Analysts' Opinion
Wall Street seems to be divided in its opinion. Several analysts remain skeptical given the size of the mammoth deal and the exorbitant debt taken to fund the deal, which is likely to result in a huge interest burden. With $12 billion debt already on Dell's balance-sheet, adding another $40-$50 million does not make sense. Plus, the multiyear integration process will be cumbersome.
However, analysts who view the deal as a positive argue that it is in line with Dell's “reinvention” plans. Dell is increasingly trying to become an “enterprise-oriented firm” and has been growing its storage, server and security businesses to increase profit margins as personal computer markets deteriorate. Bringing EMC under its fold is in line with this transition. With this acquisition, Dell will have access to EMC's cloud services and big data storage operations. EMC acquisition will help Dell become the third largest player, in terms of revenues, in the enterprise technology space right behind Hewlett-Packard Company (HPQ – Analyst Report) and IBM Corporation (IBM – Analyst Report).
Why Is Cloud Computing So Important?
The ever-evolving technology sector has been seeing a number of new trends over the past couple of years. Of these, the notable ones include cloud computing, Big Data, Bring Your Own Device (BYOD), Internet of Things, flash storage, social networking and 3D printing.
These trends have brought about a massive change in the IT sector. Last year, we saw mainstream adoption of cloud computing by enterprises, something that will likely continue over the next few years. The exponential growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals compelled several companies to turn to cloud computing vendors.
There is also an ongoing revolution in the way people use devices and communicate with each other, which is leading to increased adoption of mobile devices by consumers. The convenience and accessibility enabled by mobile is also driving employers across many sectors to move toward BYOD. However, the nature of work differs across organizations and broader adoption of BYOD can only be possible through the utilization of cloud resources.
Cloud computing consists of the entire gamut of computing intelligence required to carry out day-to-day operations by companies and professionals. This basically means that other than the hardware, which could be of any shape or form, all the supporting technology involved in creating, storing, retrieving, transporting, protecting, sorting, processing, analyzing and presenting information from multiple sources and formats, which when available from a shared (private) or public pool, could be referred to as cloud computing.
Cloud service providers therefore help organizations to store data and applications remotely in this pool, which can then be accessed from anywhere and at anytime via the Internet.
Given its scope and advantages (cost, scaling, convenience, etc), it's not surprising that the demand for cloud computing software and applications is on the rise. Cloud vendors usually offer the infrastructure or other technology as a service, which further reduces costs for adopters. According to Centaur Partners, Software-as-a-Service (SaaS) and cloud-based business applications are likely to grow from $13.5 billion in 2013 to $32.8 billion in 2016, reflecting a compounded annual growth rate (CAGR) of 19.5%. Moreover, Computerworld forecasts that 42% of IT decision makers are planning to increase spending on cloud computing in 2015.
Another research firm, IDC projected last year that public IT cloud services spending will grow at a five-year CAGR of 22.8% to over $127 billion in 2018. The growth rate is six times higher than the broader IT market. In 2018, public IT cloud services will make up over 50% of the global software and storage development.
As mainstream adoption gathers steam, infrastructure has to be built rapidly. It would therefore be more advantageous for leading vendors to collaborate or even merge their capabilities to capture a larger share of the pie.
4 Alternative Bets in the Computer Storage Space
With the cloud computing industry becoming more lucrative than ever, we bring you a few promising stocks, which could be interesting long-term investment options for those interested in the space.
NetApp Inc. (NTAP – Analyst Report)
NetApp Inc., formerly Network Appliance, Inc., is a leading provider of innovative data management solutions that simplify the complexity of storing, managing, protecting, and retaining enterprise data. Market leaders around the world choose NetApp to help them reduce cost, minimize risk and adapt to the changing times and requirements.
The company currently sports a Zacks Rank #1(Strong Buy) and has a Value Style Score of ‘B'. Its long-term EPS growth rate of 11% is more than the industry average growth rate of 9.8%.
Qumu Corporation (QUMU – Snapshot Report)
Headquartered in Minneapolis, MN, Qumu Corporation deals in enterprise video content management software and provides related products via the sale of software on server appliances, software licenses and a cloud-oriented SaaS platform.
The company currently has a Zacks Rank #2 (Buy) and its long-term EPS growth rate of 17.5% is significantly higher than the industry average growth rate of 9.8%.
Red Hat Inc. (RHT – Snapshot Report)
Red Hat is a leading developer and provider of open source software and services, including the Red Hat Linux operating system. Unlike proprietary software, open source software has publicly available source code and can be copied, modified and distributed with minimal restrictions. The web site, REDHAT.COM, is a leading online source of information and news about open source software and one of the largest online communities of open source software users and developers.
The company currently carries a Zacks Rank #2 and has a long-term EPS growth rate of 15.8%, which is more than the industry average growth rate of 14.1%.
Equinix Inc. (EQIX – Analyst Report)
Equinix designs, builds and operates neutral Internet Business Exchange centers where Internet businesses place their equipment and their network facilities in order to interconnect with each other. The neutral IBX centers provide content providers, application service providers and e-commerce companies with the ability to directly interconnect with a competitive choice of bandwidth providers, Internet service providers and site and performance management companies.
The company currently carries a Zacks Rank #2 and has a long-term EPS growth rate of 17%, which is more than double the industry average growth rate of 6.8%.
