Editor’s note: The sale of Dell Software Group to Francisco Partners and Elliott Management comes after the March announcement that NTT DATA will acquire Dell Services; both developments are driven by the need to jettison noncore assets and generate additional financing for Dell’s planned acquisition of EMC, says Technology Business Research.

HAMPTON, N.H. – Dell announced earlier this week the definitive agreement of the acquisition of its software group by Francisco Partners and Elliott Management. All Dell Software Group brands except Boomi are included in the transaction.

A purchase price was not disclosed, but TBR estimates the transaction will close for between $3 billion and $4 billion.

The sale of Dell Software Group comes after the March announcement that NTT DATA will acquire Dell Services; both developments are driven by the need to jettison noncore assets and generate additional financing for Dell’s planned acquisition of EMC.

  • Following a multiyear acquisition spree, Dell struggled to integrate various software assets and drive consistent revenue growth and profitability

Dell Software Group has built a portfolio from acquired assets since its inception in 2012. One of the largest purchases was Quest Software, which it acquired for $2.4 billion in 2012. After strong financial performance in 2014, during which Dell Software Group grew revenue 13.9% annually, revenue declined 8.8% annually in 2015 to $1.4 billion. At the end of 2015 Dell Software Group reorganized internally and began reducing headcount. The reorganization was structured around four product groups: Systems and Information Management, Security, Statistica and Boomi.

Financial results from 1Q16 released by Denali Holdings Inc. on June 10 showed the financial impact and extent of Dell Software Group’s cost-cutting measures. The group kept revenue flat year-to-year in 1Q16 at $334 million. More importantly, Dell Software Group cut expenses significantly and achieved operating margin of 8.4%, which, according to TBR estimates, made 1Q16 the most profitable quarter on record for Dell Software Group.

Francisco Partners and Elliott Management will seek to build on this profitable momentum and improve the cost savings and efficiency of Dell Software Group post-acquisition. The group’s long-term strategy will be to reestablish Quest Software and SonicWall as independent entities with individual branding and cost structures so they can return to growth more quickly. Before being acquired by Dell in 2012, these organizations operated their own sales, marketing and partner programs, which TBR believes are largely intact. We believe Dell Software Group’s acquisition by Francisco Partners and Elliott Management will enable Quest Software and SonicWall to return to growth as independent entities.

  • Selling software assets eliminates overlap and redundancy with VMware and Pivotal but will leave a gap in Dell’s analytics and IoT portfolio

The sale of Dell Software Group marks the end of Dell’s strategy to build a higher-value business based on its branded software solutions and signals a shift to embrace the software assets of the EMC federation. It also indicates the soon-to-be-formed Dell Technologies will take an infrastructure-centric approach to the market, using its server and storage strengths to provide the necessary pieces for converged and hyperconverged systems as well as cloud components. This is a similar strategy to competitors such as Hewlett Packard Enterprise (HPE), which rebranded itself as a software-defined infrastructure company. We believe HPE will look to capitalize on the acquisition of Dell Software Group assets by promoting the strength of its internal HPE Software group, which was consolidated and realigned around key engagement areas after the separation of Hewlett-Packard Co. (HP) Nov. 1, 2015.

After EMC and Dell merge, the combined company, proposed as Dell Technologies, will be able to leverage software solutions from EMC, VMware and Pivotal and will no longer require the majority of its management and security portfolio. Selling solutions such as Quest Software and SonicWall creates an opportunity for financing and eliminates the additional time and costs needed to integrate these portfolios into the combined Dell-EMC ecosystem, allowing the combined organization to rapidly deploy joint IT architectures and delivery models post merger.

However, specific products such as Boomi and Statistica have flourished under Dell, becoming essential parts of the vendor’s cloud brokerage, analytics and Internet of Things (IoT) portfolios. The creation of a stand-alone business unit for Boomi at the end of 2015 will allow Dell to continue building the brand with little disruption, marketing Boomi as an essential piece of its cloud brokerage and integration strategy. After the acquisition of EMC closes, we expect Boomi to play a more prevalent role in EMC’s native hybrid cloud platform alongside vSphere, Photon and Virtustream, connecting cloud resources across on-premises and managed environments.

Like Boomi, Statistica also was separated into an autonomous business unit at the end of 2015, so the transition of assets to Francisco Partners and Elliott Management should be smooth. However, we believe the move puts Statistica’s product strategy in a state of flux over the long term. Statistica is positioned as an essential part of Dell’s IoT platform strategy and edge analytics capability, and was recently bundled with new products, including the Dell Edge Gateway. Statistica was also combined with Kitenga (acquired in 2012) to form an analytics suite under Dell Software Group. Dell will seek to maintain these relationships by keeping Statistica available through its IoT Partner Program for new and existing customers. However, we believe Statistica’s divestiture will cause Dell IoT and analytics customers to pause as they consider their long-term options.

As an independent company, we expect Statistica to quickly expand partnerships outside the Dell ecosystem. The StatSoft Partner Program still exists and Statistica can leverage this program to quickly expand technology partnerships with analytics platform and services providers such as Oracle, SAP, Microsoft and IBM. Over the long term, Statistica’s ability to provide solutions for SMBs in specific verticals including pharmaceuticals and healthcare will make it an attractive partner. We believe Statistica will also be a possible acquisition target for large vendors such as IBM and Cisco, or close Dell partners such as GE and PTC, which are looking to bolster their industry-specific analytics and IoT capabilities.

  • Dell splits its security assets to pursue separate paths in the security market

The announcement of Dell Software Group’s acquisition is yet another example of the vast changes transpiring in Dell’s security portfolio and strategy this year. Dell’s network security products from its earlier acquisition of SonicWall and its identity and access management (IAM) products from its earlier acquisition of Quest Software will move to the new entity owned by Francisco Partners and Elliott Management. With Dell’s security services portfolio spun off in an IPO earlier this year (although SecureWorks still remains a subsidiary of Dell), this will leave Dell’s data protection and encryption (DDPE) products as the only distinct security line left within the Dell portfolio.

Although the transitions will be difficult, they are necessary adjustments to the changing outlooks in the network security, IAM, data security and security services market segments. By the end of next year, each of these Dell security business units will be better positioned with new alliances and technologies to generate stronger revenue growth and capture larger shares in their respective segments. Dell’s peers are taking similar actions to separate security business units and refine their focus along new parameters such as security appliances or security subscription services. In the past year, for example, HPE divested its Tipping Point network security unit and Intel divested its Stonesoft firewall unit.

Francisco Partners and Elliott Management have stated they intend to position and brand SonicWall separately. TBR believes this will provide the SonicWall team with greater autonomy to accelerate its revenue growth. According to TBR’s Enterprise Security Market Forecast, 2015-2020, revenue growth in the network security segment is decelerating, particularly for traditional firewall and intrusion protection system (IPS) products, as customers shift some of their security budgets to advanced threat detection technologies outside their network infrastructures.

TBR believes the SonicWall team will evaluate integrating its network security features into other vendors’ solutions, such as endpoint threat detection or data loss prevention (DLP) solutions, under the terms of new alliances with vendors that would have been less likely under Dell’s previous security business structure.

Keeping the DDPE products within the Dell portfolio helps the vendor maintain a key value proposition for its enduser computing devices. The DDPE products provide file-level encryption, as well as some antimalware, web filtering and other security features, for commercial endpoints. This will enable the Dell to differentiate its endpoints in part based on security features that are often built in at the time of manufacturing. It will also provide customers with the ease of a single source for endpoint, data, and antimalware purchasing and support.

  • Long-term implications

In general, software assets can be retired or cost-effectively maintained to generate healthy gross profit margins. But this scenario would not be ideal for Dell, which has an immediate need for cash due to the impending acquisition of EMC. The acquisition of Dell Software Group will help Dell increase its financing and reduce overlapping product families within the EMC federation.

EMC can approach its install base with a message that highlights consistency and standardization, bolstered by Dell divesting itself of overlapping assets.

Dell will reassure customers by maintaining reseller license agreements and close partnerships with divested entities such as Statistica.

Overall, the acquisition will simplify decision making for future customers of the merged Dell-EMC entity and provide a compelling argument that the EMC federation will continue to lead development of technology solutions for future hybrid IT environments.

(C) TBR

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