Analysts like Dell’s post-EMC prospects, but not so much HPE’s

DV and SM

History may well mark Labor Day week of 2016 as the end of an era in enterprise computing.

The completion of Dell Inc.’s acquisition of EMC to form Dell Technologies Inc., along with Hewlett-Packard Enterprise Co.’s (HPE) sale of most of its software business to UK-based Micro Focus International plc has taken two venerable players out of the mainstream enterprise infrastructure market.

It’s questionable whether either company can again enjoy the success they once did, but Wikibon Co-Founder and Chief Analyst David Vellante (@dvellante, above right) and Senior Analyst Stu Miniman (@stu, left) are more optimistic about Dell’s outlook than HPE’s. The two analysts got together for a video discussion on theCUBE to review a momentous week in technology.

The sale of HPE’s software portfolio for less than half of what it cost to build is a capitulation, Vellante said. “HPE gave up in software. This is the dismantling of a Silicon Valley icon,” he said. With the company placing all its bets on selling infrastructure hardware and cloud-bridging services, future growth is by no means a given.

EMC is gone as well, but it died for the cause of building a bigger and stronger entity in Dell Technologies Inc. Miniman expressed admiration at the speed and precision with which the merger was completed. “I’m comfortable with the strategy that Dell Technologies has,” he said. “There are so many pieces that had to go into making this plan. Kudos to them for not having to make any major changes.”

HPE’s future is less certain. Having divested itself of its consulting business and now most of its software business in tax-friendly arrangements that HPE Chief Executive Meg Whitman terms “spin mergers,” HPE is a much smaller company than it was when it broke away from Hewlett-Packard, Inc. nearly a year ago. “I’ve been saying for a long time that HP has to shrink in order to grow,” he said. “Well, it’s shrunk. The question is can it now grow?”

Cloud headwinds

Both Dell and HPE will be focused on serving enterprise needs for hyper-converged and integrated platforms and serving as “arms dealers” to cloud providers. There appears to be good short-term growth in that strategy, but there are also significant headwinds.

One is cloud providers themselves. With lower prices than on-premise alternatives and bigger profit margins, cloud infrastructure providers like Amazon Web Services LLC and Microsoft are poised to take an increasing amount of business away from on-premise competitors. “Amazon is cleaning up,” Vellante declared. “The volumes and efficiencies that Amazon, Microsoft and Google are driving, compared to the enterprise guys, are scary.”

Another wild card is China, where the government has indicated that it not only wants Chinese companies to dominate its local market, but also increasingly reach into other geographic regions. Both analysts said they are impressed with the progress China has made.

“The work that China has done on the latest microprocessors has my network buzzing,” Miniman said. China today claims four of the 10 fastest supercomputers in the world – powered by Chinese processors and software. Huawei Technologies Co. Ltd. has been gaining share in the networking market and it’s only natural for Chinese companies to go after storage business as well. “The government definitely has interest in controlling its market and keeping the largest player out, which is Dell,” Miniman said. Dell has not said what concessions it made to get the Chinese government’s approval for the EMC acquisition.

Mixed outlook

In general, Vellante and Miniman were positive about Dell’s prospects and dubious about HPE’s. Dell did a superb job of preparing for its takeover of EMC and has hit the ground running. “The Dell EMC signs are already up and the emails have been changed,” Vellante said. More importantly, the company has preserved much of the core EMC organization and made its intentions clear about what it will keep and what it may divest. “There isn’t too much uncertainty about who’s running what” at Dell Technologies, Vellante said.

David Goulden DellOne notable acknowledgment of the strategic value of EMC is Dell’s selection of the acquired company’s former head of infrastructure – David Goulden (right)- as head of the combined Dell server and storage division. “David Goulden now has a big piece of Dell Technologies to sell,” Vellante said. Michael Dell has been definitive in saying that he does not plan to sell off big parts of the EMC hardware division or VMware Inc., which is “a crown jewel,” Vellante said.

HP is a different case. Battered by years of turmoil at the top, poor investment decisions and growing pressure on its infrastructure products, the company is struggling to find a long-term growth path.

Vellante recounted that the spiral began 15 years ago when former CEO Carly Fiorina failed to acquire PricewaterhouseCoopers LLP and had to settle for Compaq Computer Corp. Then it spent nearly $14 billion to buy Electronic Data Systems Corp., which Vellante bluntly terms “a boat anchor. IBM sucked up all the business that was up for renewal,” he said. The disastrous $11 billion acquisition of Autonomy Inc. and subsequent $8.8 billion write-down was another setback. “Now you see Meg Whitman trying to clean up that mess,” Vellante said.

The future appears to belong to a new crop of cloud-savvy companies like Apple, Google, Facebook and Amazon that are taking enterprise business away from the legacy infrastructure vendors. IT organizations are “not managing infrastructure as much as they used to,” Miniman said. What they do manage is “packaged, automated and outsourced, and they tend to have relationships with a small number of technology partners.”

So it’s the end of an era, but also the beginning of a new one. Whether the companies that dominated the previous generation will find a way to dominate the next one is still an open question, but history is not on their side.

Watch the full video below (32:21).