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Is the Dell-EMC merger a good deal?

Posted: 13 Oct 2015 ?? ?Print Version ?Bookmark and Share

Keywords:synergy? cloud? enterprise? server?

Everybody in the tech industry is talking about the latest synergy, which also happens to be one of the biggest in all sectors, between two traditional companies.

Dell's $67-billion bid to buy storage giant EMC draws attention to a consolidating industry, where companies buy rivals in order to drive growth. While such a move is expected in an evolving market, one question remains in everybody's mind: Is it a good deal?

Timing is one thing to consider in judging the merits of the pending acquisition. The announcement came as PC sales, the main driver of Dell's revenues, continue to plummet with slow demand among enterprises and consumers.

Gartner reported a 7.7 per cent decline in PC shipments in the third quarter compared with the same period last year, while IDC projected it at 10.8 per cent year-over-year.

As mobile devices continue to challenge the PC market, the world's third-largest computer maker intends to use the deal as a way of diversifying its portfolio. By combining its server businesses with EMC's storage and virtualisation expertise, the new company will be able to offer a wider range of products in various applications such as cloud computing, mobility and cyber security, according to a Reuters report.

As such, Dell will be in a better position to challenge its rivals Hewlett-Packard and IBM, which are also succumbing to market pressures. Last year, HP announced it is splitting into two smaller companies, one for PC/printer and another for servers. On the other hand, IBM sold its microelectronics business to GlobalFoundries earlier this year and its x86 PC and server businesses to Lenovo.

However, not everyone is convinced that this deal will help spur Dell's growth. For one, an integration as big as this can be "distracting and confusing and can take a lot of time," Steve Herrod, VMware's former CTO, said in a Wall Street Journal report.

HP's CEO Meg Whitman also had a say in this latest move by its competitor. In a memo to its employees, which was acquired by WSJ, Whitman predicted that Dell and EMC, along with their customers, will have a tumultuous time in consolidating their products, employees and sales channels.

Another major roadblock to the Dell-EMC deal is debt. According to CNBC's David Faber, the merger will result in at least $45 billion in additional debt to both companies. EMC's Q2 earnings statement shows that it has more than $5 billion in long-term debt and over $2 billion in short-term commercial paper outstanding.

Dell, which became private for about $25 billion in 2013, discloses finances to its shareholders confidentially.

Dell CEO Michael Dell is aware of these difficulties, but he and Joe Tucci, CEO of EMC, said in a WSJ report that the benefits far outweigh the challenges. Once the deal is completed, Dell will utilise EMC's "converged infrastructure" to sell computing, storage and networking equipment as an "easy-to-install" bundle.

“You get an unbelievably strong position when you put Dell and EMC together in that very important, growing space,? Dell said in a WSJ interview.

- Stephen Padilla
??With inputs from Rick Merritt and Vivek Nanda

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