The proposed merger of Dell and EMC, announced Oct. 12, would create one of the world’s largest IT companies, with its greatest strengths in products. Initially, the combined entity will remain in the hardware world — playing to the respective IT infrastructure strengths of Dell and EMC to more comprehensively address a broader array of workloads across the spectrum of customer segments.

However, success is not guaranteed; the integration process will require challenging internal change management and an accelerated shift in the combined business model to more comprehensively embrace the shift to “as a Service” IT models.

The Dell-EMC company will first extend its focus to addressing the shift to “as a Service” IT delivery by enabling building private and public cloud data centers. What remains to be seen is how the combined entity will enter the business of “as a Service” — building from Dell’s cloud integration and brokerage competencies and the hybrid cloud management and managed services capabilities that the EMC Federation brings to the table.

While both companies leave the majority of cloud service delivery to partners, EMC’s foray into managed private cloud services through its acquisition of Virtustream earlier this year marked an evolution in its business model to better help customers migrate to, build and manage clouds. TBR expected EMC to map its cloud services capabilities to legacy strengths, such as mission-critical, data-centric workloads. However, the integration into the Dell portfolio will expand this scope, adding complexity to this strategy. TBR believes a cohesive and unified portfolio and message around hybrid cloud services will be critical to the long-term success of Dell-EMC.

Business as usual

Although portfolio integration will lay the groundwork for the proposed Dell-EMC entity to execute on growing opportunities in the data center, such as cloud data center build-outs, equally important are the integration and natural synergies of the soft assets being brought together by the merger. Typically, successful technology executives possess strong personalities and opinions, which filter into sales and compensation plans, channel partner programs, and other business levers.

TBR believes Dell and EMC bring distinctive and differing cultures to the table that will be challenging to integrate. The selling strategies of both companies have been highly successful historically but have become less effective as end customers have shifted to the cloud. Dell has long-standing expertise in maintaining an optimized, low-cost distribution channel for moving commodity hardware boxes from low-end desktops and laptops through a growing push into optimized server infrastructure.

EMC, on the other hand, has a highly motivated, aggressive direct selling organization with a penchant for selling to data center managers. Neither has a strong history of delivering transformation services, although EMC has been making more progress in building out those capabilities than Dell.

Culturally, there will be many moving parts as the deal is finalized over the next several months. In addition to activist investors, customers, partners and employees will be ruminating on how the merger will impact their interests. Timely communications that reassure these different constituencies will go a long way toward determining the success or failure of the combined entities once the deal becomes final in 2016.

·Do Dell and EMC focus time spent assuaging investor, end customer, or major partner concerns?

Dell and EMC face a delicate balancing act. Activist investors can focus on the short term unlocking of value, which has been the main skirmish around VMware. Still, strategic end customer accounts will need to be visited by their sponsor executives to allay concerns over the viability of their long-term investments. Global systems integrators (SIs) have to be approached with Dell and EMC working diligently to gain a greater share of wallet from these critical market influencers where strategy-led engagements drive a lot of product sales. Dell and EMC have to prove to the SI community they should invest more with the combined companies rather than less.

·How fast will Dell and EMC merge their selling efforts?

Rushing too quickly into consolidation can challenge cultures. Dell and EMC have different corporate personalities and may conflict, evidenced by the discontinuation of the cross-selling agreement the two firms had earlier in the decade.

·How quickly will Dell try to drive down EMC’s sales and marketing expenses?

TBR modeling estimates EMC spent 26.1% of revenue on sales and marketing expenses during 2014, as Dell spent 11.3%. It will be easy for Dell to overlay financial controls optimal for volume selling motions onto a high-end enterprise direct selling model. If that happens, TBR expects an acceleration of the brain drain that always accompanies acquisitions of this magnitude. We believe Dell needs EMC’s selling assets as much as, if not more than, EMC’s technology assets to make this acquisition work, and it should

proceed with caution. Activist investors with little direct experience managing and running a technology operation will not have sufficient knowledge of the long-term implications to aggressive, short-term cost- cutting methods.

Impact to Dell and EMC Hardware

If the pending deal goes through, the combined Dell and EMC corporation will remain an entity heavily reliant on hardware, in revenue and profit, at least for the near term. Dell’s Client Solutions business — mainly comprised its PC offerings — will remain the largest segment, contributing more than 40% of total revenues. Additionally, TBR predicts Dell and EMC will independently generate more than $20 billion in data center hardware (servers, storage arrays and data center networking) sales during 2015, for a combined revenue base falling shy of just one competitor, HP. Nearly 50% of this revenue base will generate from sales of storage systems, for a storage systems top line that will more than double those of all closest competitors. Because EMC’s robust storage arrays intrinsically carry a higher margin profile than Dell’s core industry-standard server franchise, integration with EMC’s storage business will boost the bottom line of Dell’s data center business, which TBR estimates closed out 2014 at a low-single-digit operating margin.

Software

The extent to which data center sales will influence corporate revenue and profitability post-merger will be determined by the stake in VMware that Dell retains. VMware posted operating profits of $1 billion in 2014 (16.9% of revenue), compared to $2.1 billion (3.1% of revenue) notched by Dell, per TBR estimates. Dell plans to sell an additional 53% of VMware to the public through tracking stock shares, in addition to the 20% of the company that is publicly traded. This would reduce Dell’s stake in VMware to 25% to 30%, compared to the 80% EMC owns.

Especially considering the erosion that continues to impact industrywide hardware profitability — an effect of commoditization, pricing pressures and investments in more sophisticated sales models — this reduced investment stake will hamper the margin profile of the integrated businesses.

Services

From a services perspective, EMC will add more than $1 billion in quarterly revenues, to the more than $2 billion in quarterly revenues Dell Services generates. According to TBR’s 2Q15 IT Services Benchmark, these added revenue streams will catapult Dell Services from 15th in revenue size to sixth, trailing TCS, Fujitsu, HP, Accenture and IBM. However, these services competencies are largely product-centric, with Dell and EMC historically focusing primarily on supporting and maintaining their respective product sets. Neither business is strong in solutions-oriented consulting capabilities or in addressing line-of-business buyer needs — critical components needed to reinvigorate total revenue and profit growth.

IT transformation decisions are being pushed up the management stack to CxO positions, requiring management consulting to lead the discussion to further IT infrastructure transformation. Dell and EMC have acknowledged the need to embrace consultative selling motions to deliver IT during this transformational period in technology, but TBR does not believe that strictly combining Dell and EMC will address the shift in demand to a software- and services-led consumption based model that has severely impacted these historically hardware-heavy companies.

Impact to competitors

The planned Dell-EMC merger throws another wrench into the volatile IT landscape. Large IT providers CSC and HP are undergoing corporate splits, IBM marks one year since the divestiture of its industry-standard server business

to focus on software- and services-driven IP, and Dell continues along its road map as a private company. To navigate industry noise, vendors are shifting from focusing on the specific components composing their portfolios, such as data center hardware and public cloud services, to emphasizing the net business challenge a set of products, software and services can address.

This shift in focus holds especially true for IBM and HP in recent months, both of which are promoting their hybrid IT portfolios with a combination of cloud and noncloud solutions and focusing less on messaging the technical aspects until they speak with IT personnel who are seeking more in-depth descriptions. TBR believes this poses a notable threat to Dell and EMC, neither of which can hold much ground against the breadth and depth of IBM and HP in their cloud portfolios and end-user buy-in gains.

A combined Dell-EMC organization has the opportunity to build from their combined presence running many of the world’s largest and most demanding data centers to increase share of wallet with investment in value-add software and services capabilities. This route would require high investment and quick ROI to maximize growth and profit returns.

Merger marks significant industry consolidation

From a hardware-specific perspective, the Dell-EMC merger marks significant industry consolidation, disrupting alliance models that were shifting to co-opetition as a result of data center convergence and the rise of software- defined functionality. Notably, tensions between Cisco and the EMC Federation have grown over the past three to four years. We expect this relationship to be further strained by EMC’s integration into Dell. TBR does not expect Cisco or EMC to walk away in the near term from their joint venture for Vblock converged systems, due to the large scale of the Vblock business.

However, we believe Cisco will continue actively pursuing alternate partners, for example allying with IBM and SimpliVity earlier this year for converged and hyperconverged systems. These initiatives will reduce Cisco’s revenue reliance on EMC and VMware over time, which TBR expects will further incentivize Cisco to sharpen its focus on displacing Dell and EMC.

TBR expects Lenovo to have an immediate competitive response. Lenovo is working aggressively to gain data center market share, but it faces a strategic challenge in the form of its limited in-house competencies around storage, networking and outcomes-focused line-of-business sales models. Lenovo is filling out hardware portfolio gaps steadily, launching its first Lenovo-developed storage arrays in May of this year, but work remains for Lenovo to be able to compete organically against an end-to-end Dell and EMC stack.

TBR expects EMC’s merger with Dell to dissolve the storage giant’s reselling relationship with Lenovo in China, through which Lenovo has augmented its presence in SMB accounts in the country with more complete solutions. This will force Lenovo to work even more quickly to partner with others, acquire or build its storage practice.

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.

Authors of the report are:

Krista Macomber (krista.macomber@tbri.com), Analyst, Data Center Stuart Williams, Vice President, Research

John Spooner, Director, Internet of Things and Devices Practice Geoff Woollacott, Practice Manager and Principal Analyst, Software Cassandra Mooshian, Analyst, Cloud

Kevin Collupy, Research Analyst, Services

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.