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Why is Dell really dropping its assets? To fund its EMC acquisition

27 Jun 2016

Dell is cutting its losses with its sale of Dell Software Group, according to a Technology Business Research white paper, titled 'Selling the Software Group makes strategic and financial sense for Dell and its partners'.

The white paper details how Francisco Partners and Elliott Management are acquiring all Dell Software Group brands - Except Boomi, for what TBR estimates to be between $3-4 billion.

Several years ago Dell acquired a range of assets for its portfolio, including Quest Software, a transaction worth $2.4 billion in 2012. Now, however, Dell has decided to drop its Software Group assets. Dell has also relinquished control of Dell Services, which will be acquired by NTT DATA.

The reasons behind this are largely due to revenue. In 2014, Dell Software Group's revenue grew 13.9% annually, but in 2015 this decreased to 8.8% annually to $1.4 billion.

Dell's strategy is to drop its non-core assets, in order to gain financing for its planned acquisition of EMC.

At the end of 2015, TBR reports that Dell also started cost-cutting measures, including reorganisation of its four core product groups: Boomi, Security, Statistica and Systems and Information Management.

Even with this, its  Q1 2016 revenue stayed flat at $334 million, while its operating margin grew to its most profitable quarter on record of 8.4%.

TBR predicts that Francisco Partners and Elliott Managements' probable strategy will build on the profit coming from its margin and use this to implement more cost-cutting. They will also seek to position Quest Software and SonicWall as independent brands - which should be relatively efficient as their previous sales, marketing and partner programmes prior to Dell's takeover are 'relatively intact'.

Analytics​

The Dell and EMC merger will concentrate on what TBR believes will be an infrastructure-centric market approach, where hyperconvergence and cloud components through server strengths will be crucial to their strategy, which is similar to what Hewlett Packard Enterprise did when it split from HP and redefined its business as a software-described-infrastructure.

As a result, VMware and Pivotal and EMC's own solutions will take a back seat in the security and management stakes, leveraged by financing opportunities through Quest Software and SonicWall sales.

Boomi and Statistica will form the core of cloud, analytics and IoT solutions. TBR believes that once the EMC merger is complete, the standalone Boomi will join vSphere, Photon and Virtustream in the hybrid cloud environment.

TBR also believes Statistica will become a standalone unit, particularly as it was bundled with other analytics platforms including Dell Edge Gateway. Existing partnerships with other companies such as Kitenga will be mainained, but this will have an effect on Dell IoT customers. As a result, Statistica may consider external partnerships with organisations such as Oracle and IBM, and into sectors such as healthcare.

Security portfolios

Earlier this year Dell relinquished its security services portfolio, with only its data protection and encryption (DDPE) products remaining. TBR believes that "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."

SonicWall as an independent brand will increase revenue growth. TBR's Enterprise Security Market Forecast, 2015-2020 found that revenue growth in network security is slowing down as companies look outside their infrastructures for network security.

As a result, TBR predicts that SonicWall will offer solutions that combine with other vendors' products, such as endpoint threat detection or data loss prevention, which include file encryption and anti-malware and web filtering for enterprise endpoints.

TBR states that this method will allow for endpoint differentiation based on inbuilt security features, as well as a single source of security protection for customers.

The future

Dell's relinquishment of assets to ensure the EMC acquisition goes smoothly is touted as a way to remove overlapping assets, TBR believes. Dell will have to reassure its customers by providing close relationships with existing partners and maintaining license agreements, while attracting new customers through its divested and independent units.

TBR concludes that the Dell-EMC merger is a sign that EMC will "continue to lead development of technology solutions for future hybrid IT environments."

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