Why A Dell-EMC Merger Only Makes Sense in the Short Term

“I don’t necessarily see this as a move out of weakness, I see it more out of strength.”

By Joy DiazOctober 9, 2015 11:01 am

The business deal between Round Rock-based Dell and data storage giant EMC has been described as a guppy trying to swallow a whale. The guppy in this particular metaphorical fish tank is Dell, valued at a mere $25 billion.

That’s only half of what EMC is said to be worth. If this deal moves forward, it would be the largest ever in the tech industry.

Patrick Moorhead is the founder and principal analyst at Moore Insights & Strategy based here in Central Texas.

You’ve said that this deal only makes sense in the short-term. Why is that?

“There’s a lot of different ways this deal could go. Dell could be buying part of EMC’s storage line, it could be a merger between the two companies, and then there’s this very important company that is owned by EMC called VMWare that powers most of the enterprise’s software today.

“So, my assumption going in is this deal would be more of a merger than a Dell acquisition…. For the short-term, let’s say three to five years, I see a lot of business possibility for the two companies in storage, but this is not where the market’s headed.”

If we assume that mergers are tactical, what could be the strategy where Dell is based?

“I think what they would be thinking is that for three to five years, Enterprise Storage could throw off an incredible amount of cash, and when it comes to a private company, throwing off cash to pay down the debt is the number one thing you can do. And to be fair, for Dell, they’ve invested $16 billion in Enterprise Acquisitions since 2006.”

Dell has been facing a very difficult future moving forward. How do you answer people who ask you about that?

“Dell fundamentally is solid. Now, all we can see is the price of their debt — which, by the way, is looking good. What Dell did is they got caught in a transition between becoming an enterprise company and becoming a PC company. It came too late. So I don’t see this necessarily as a troubled company doing this because they’re troubled…. I see it more out of strength. The company couldn’t even be considering a move like this if they weren’t throwing off a tremendous amount of cash already.

“Now, again, I want to be clear: my only barometer on this is based on the price of their debt, which, if you’ve been tracking that, it shows very positive signs out there because the rating has gotten 2 or 3 grades better over the year since it’s been private.”