Dell Acquires EMC for $63.1B

An indelible mark on enterprise IT

-by Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

 

Q1 2015 Storage M&A and Funding Highlights

Q1 2015 M&A was HOT with 7 deals and more than $600M in total consideration while funding started the year off strong with $363M from 9 rounds, with a continued focus on later stage start-ups.  Highlights from the quarter include:

 

– J2 Global dominates Q1 M&A representing 4 out of the 7 announced transactions

– The largest Q1 2015 deal was Avago Technologies’ $606M all-cash acquisition of Emulex, a provider of network connectivity, monitoring, and management

– Another notable transaction is WD/HGST’s aggressive move into object storage with the acquisition of Amplidata.  This transaction follows the Red Hat purchase of open source object storage provider Inktank last year. There is likely to be more M&A in this sector as leading storage providers look to build competing object storage offerings against Red Hat and WD.

– Q1 2015 Storage related funding started the year off strong with $363M from 9 rounds, with a continued focus on later stage start-ups.  Q1 2015 funding was comparable to Q1 2014 with $333M from 8 rounds with an average round size of $41.6M. 

– Q1 2015 funding was elevated by Simplivity’s $175M round, which was more than all its previous rounds combined and more than double its last round of $58M.  Simplivity appears to be following the example of Cloudera and Pure Storage which raised substantial private rounds that equated to the proceeds that were traditionally generated from an IPO. 

 

 

2014 Storage Market Review

“A Record Year for Venture Funding and a Solid Year for M&A”

After two strong years of venture funding and M&A in 2012 and 2013, there was general consensus that the market would cool down in 2014.  After two $1B dollar venture funding years, we would see figures drop back to $800M or possibly lower.  M&A would stay active but 20 to 25 transactions seemed like a reasonable forecast.  Well, we ended up with a record $2.3B in venture funding and M&A topped out at 31 deals worth $3.2B in consideration.  There was not one “hot” segment but rather a broad range technologies, products and business models supported by M&A and venture funding.   The current consensus is that the market is not going to slow down in 2015 and that we are still in the early days of significant technology innovation and market disruption.  Will 2015 match the current market sentiment?  Our take is that M&A will be strong in 2015, driven by the incumbents renewed appetite for early stage companies and that venture funding will pull back closer to $1B, unless we see more $900M rounds like Cloudera.  Highlights include:

2014 finished with a total of 31 deals, up 24% from 2013.  Total consideration in 2014 was $3.2B, significantly less than 2013, 2011, 2010 and 2006 due to the lack of mult-billion dollar deals and the lack of +$100M deal

Of the 31 deals in 2014, 24 were technology focused with a median deal size of $23M and a price to revenue multiple of 6.0X.  The remaining 7 transactions were business focused with a median deal size of $355M and a price to revenue multiple of 2.9X.

2014 storage related venture funding was at an all-time high at $2.4B, led by Cloudera’s $900M 6th round, Pure Storage’s $225M 6th round, and Box’s $150M Later round.