Reinventing Dell

Michael Dell has never been a big fan of acquisitions or radical shifts in direction. But since returning as CEO, itself a radical move, he and his company have looked outside itself for new strength. And none of the acquisitions has been more important than this week’s purchase of EqualLogic for $1.4 billion in cash, Dell’s biggest ever takeover and its fourth this year.

It’s a smart move. And Wall Street likes it, although you couldn’t tell from a superficial check of Dell’s stock this week. Forking over that much cash invariably leads to a small cut in share prices, especially in a week that has had so much ugly macro news.

Interestingly, the acquisition (actually, the intent to buy; it won’t close till next year) has dinged both EMC and its daughter company, VMware, as well as Network Appliance. The NTAP hit makes sense, since EqualLogic is strong in iSCSI technology, the meat of NTAP’s business. But the hit to VMware and EMC makes less sense — more about that in a bit.

First though, consider Dell’s modus operandi, or MO, as the cops like to say. It doesn’t invent much, other than a once-great business model. Its storage business, in particular, is based on reselling EMC’s Clarion. Dell adds a bit of value, but not a lot. And despite the bumps of the last few years, Dell still generates a ton of cash. It had nearly $13.8 billion in the bank as of last August.

The core of Dell’s business, of course, is the PC, not exactly a hot growth area, although there’s still plenty of money to be made pushing boxes and selling services to the enterprise.

EqualLogic, though, is very different. Its hardware is optimized for storage virtualization, a rapidly growing technology, and it has good penetration in the SMB marketplace. It also has a strong presence in the channel, another area where Dell does not shine.

Dell plans to add to EqualLogic’s channel-partner programs with more EqualLogic-branded products, and it plans to incorporate EqualLogic technology into future generations of its Dell PowerVault storage line, the company said.

Here’s the real value of EqualLogic to Dell: EqualLogic, which started out as an iSCSI vendor, figured out that iSCSI and virtualization are a great match, says Brad Nisbet, a storage analyst with IDC. That’s because virtualization complicates mapping, and the best way to resolve that problem is via the Internet and iSCSI, which automatically finds the location of the virtualized storage.

EqualLogic has a strong relationship with VMware, and I don’t think that’s going to change. Not to sound snarky, but the investors who pushed down shares of the high-flying VMware this week may have been drinking marketing Kool-Aid. Virtualization is so hot that everybody who has a possible link to it uses the word in marketing materials. Yeah, EqualLogic is in the virtualization ecosystem, but it is a hardware vendor and will hardly challenge VMware. Indeed, the two are complementary.

There is probably some potential overlap between Dell/EqualLogic and EMC, but not that much. Dell’s real importance to EMC is the Clarion business, and that’s not at all affected by EqualLogic. Is there some potential for friction in the partnership now? Sure. But what the industry calls “coopetition” (ugly word, that) is an old story and an everyday part of the technology business.

Nisbet notes that EMC has not done much, if anything, to link iSCSI and virtualization, so any business lost in this area is a loss of potential business that it may or may not have fought for. Still, it’s a negative.

Morgan Stanley analyst Kathryn Huberty put it this way in a note to clients following Dell’s announcement: “Our industry checks suggest EqualLogic competes well against NTAP and others at the low end of the storage market (small, medium-sized businesses), which could slow NTAP’s channel growth next year.” Huberty doesn’t foresee much of a problem for EMC, though it’s worth noting that she is an EMC bull.

She also notes that “iSCSI storage is expected to grow approximately 400 percent over the next three years, and we believe storage sales through the channel (will) expand 9 percent.”

Incidentally, there is some feeling around the industry and on Wall Street that Dell may have paid too much for EqualLogic. It’s possible that another company (maybe HP) was in the running and that may have driven up the price.

Even so, this is a smart choice for Dell, and it shows that the PC maker is moving in a much better direction since its founder came back. Go Michael.

(Full disclosure: I own a small number of shares in EMC.)

I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.