This is probably one of the most significant acquisitions in the recent history of tech since the HP-Compaq merger in 2002. AOL-Time Warner merger which happened in 2000 was bigger at $164Bn price tag but it was more about the consumer entertainment industry rather than enterprise technology.
I had an interesting discussion with friends and colleagues about this important event and decided to write a post to capture what I make of it. So here it goes, why it is not a good idea based on the following factors.
- Most acquisitions are done at a premium, except in the case when a company has to be saved or salvaged from imminent demise. The scenario is this case is somewhat like this; The market capitalization of EMC on Sep 29th was $44.52bn, it was $54.55bn on Oct 12th, where as since March the average cap was around $51bn. Now Dell paid $67bn for EMC. So on the Sep 29th price they paid 51% premium, on Oct 12th price they paid 23% premium and on the average price since March they paid somewhere between 23% and 30% premium. Now do you know what that means, this means Dell think they can run EMC at least 23% better or on the upper side 50% better. Think of any organization’s growth in today’s market or any market, can it be 22% to 50%, specially by a new management. On top EMC’s culture is far more stronger and they are far stronger in enterprise market, Dell has always struggled to get into enterprise with their range of servers. So when a weaker company raises debt to buy a stronger company, in the short term the share holders of the stronger company can benefit by the premium price but in the long term its a bleak prospect.
- Meg Whitman, CEO of HP, sent out an email to all HP employees hoping to rally the troops by pointing out the downsides of this merger. Whitman who was reportedly in talks with EMC for a possible merger last year, walked away when the two CEOs couldn’t agree on price. From the sound of those news reports about the HP-EMC deal, the negotiations went far, meaning HP probably got a good look at EMC’s books. She pointed out in her email that Dell was taking on an awful lot of debt to make this deal happen. The total debt is $50 billion that the new combined company will have on their balance sheet, Dell will need to pay roughly $2.5 billion a year in interest alone. That’s $2.5 billion that they could allocate to R&D and other business critical activities.
- Any merger creates confusion within the two companies and in the market place. Specially when the companies are big and have a large customer base. It is seen that competition takes benefit of the situation because customers are unsure of the future. The total merger plays out over a considerable period of time usually more than a year and that is a time full of chaos and uncertainty in the companies.
- A more obvious outcome is that after the merger you have two people for every position and you can’t mix and match people from two different cultures on day one. A lot of good talent leaves due to this upheaval. There ought to be insecurities that play out not in the benefit of the new combined organization.
Having stated the above factors, I am confident that these mergers can work if handled very carefully by a dedicated management whose Golden Parachutes don’t make them jump as soon as they can. The best strategy could be to leave the two companies as is, in this case three; Dell, EMC and VMware. Synergies should be identified and played upon at a reasonable pace that does not affect business. Clear and to-the-point Communications plays a vital role both inside and outside the organization. The pressure of the shareholders & Wall street has to be managed since the appetite of the investor wants results, the very next quarter. In conclusion a long drawn thoughtful integration strategy is the only way to make such mergers a success.