When Dell Inc.’s blockbuster $67 billion purchase of EMC Corp. closed last fall, it was billed as a perfect marriage.

Unlike many big acquisitions, there was little overlap in product lines. The business models were complementary too. EMC targeted high-end customers with a major-account sales force while Dell sold direct and through channels, with midsize and small businesses making up the core of its customer base. What’s more, Dell has attempted to calm nervous EMC customers by, among other things, adopting the EMC name and naming top EMC executives to its senior management ranks.

But despite the advantages at the outset, the new Dell Technologies faces a harsh reality. For one, the computer industry is strewn with mergers-of-equals that failed to live up to expectations: Compaq Corp.’s 1998 acquisition of Digital Equipment Corp. Hewlett-Packard Co.’s 2002 acquisition of Compaq. Burroughs Corp.’s 1986 purchase of Sperry Corp. Wellfleet Communications LLC’s disastrous 1994 merger with Synoptics Communications Inc. And the list is much longer than that.

Moreover, Dell had to take on more than $50 billion in debt, a burden that will be a drag on earnings for a long time to come. The challenge is doubly difficult because Chief Executive Michael Dell (pictured) is mainly focusing on hardware, a slow-growing part of the information technology industry, more than the software that might provide higher growth and especially higher profit margins. While EMC’s federated holdings, which include VMware Inc., Pivotal Inc. and RSA Security LLC, add to Dell’s software arsenal, the big play is still storage and computers.

“Dell and EMC are good companies, but they are in a hardware business that has always been a race to the bottom,” said said Glenn O’Donnell, vice president and research director at Forrester Research Inc. “Now they’re matched up against another struggling hardware behemoth in Hewlett Packard Enterprise, public cloud providers and a bunch of Chinese vendors. I’ve got my money on the Chinese and public cloud.”

Mega-mergers like the ones listed above have historically been motivated as much by desperation as by synergy, noted David Vellante, chief analyst at Wikibon, a sister company of SiliconANGLE. “Starved for growth, the struggling firm realizes that small acquisitions can’t make a big difference and stitching together many small acquisitions is difficult. Management under pressure figures it should buy something big and drive cost out.”

Starting Monday, Dell and many other executives will make their case to some 13,000 customers, partners, analysts and media at the annual Dell EMC World conference in Las Vegas. They’ll all be looking for an answer to one main question: How can Dell pull off what virtually no other tech company has done – a successful mega-merger?

Maybe this time is different

But Dell’s situation is somewhat different from its predecessors’. As a private company since its 2013 leveraged buyout, Dell wasn’t under pressure from investors when it bid for EMC. And there is little product-line overlap, outside of low-end storage and hyper-converged infrastructure.

A confident Chief Executive Michael Dell insists that all the bases are covered. “This has been years in the making, dating back to 2001 when we originally created the Dell/EMC alliance,” he said in an interview on theCUBE last October (below). “We’ve known for a very long time exactly what we were going to do.”

That’s apparent first with Dell’s terminology regarding the deal. Although Dell has occasionally referred to the deal as a “combination,” there’s little doubt in the market about who bought whom. “I believe anything deemed a ‘merger of equals’ will be a failure,” said Forrester’s O’Donnell. “There are no mergers, only acquisitions.”

Executive retention

And although rumors of chaos within the halls of EMC swirl, the company has lost no prominent EMC executives (CEO Joe Tucci’s departure was planned from the beginning). And several of EMC’s key leaders – including David Goulden, Howard Elias and Jeremy Burton – have assumed top positions at the new company. Even VMware CEO Pat Gelsinger has stuck around, despite persistent rumors that he would leave.

Dell EMC also has maintained a leadership position in its key markets and even grown share in some cases. Dell has a strong No. 1 position in enterprise storage, according to International Data Corp. It enjoys a comfortable market share lead in converged systems and was the fastest-growing hyperconverged system market vendor in the fourth quarter of 2016, according to IDC. The research firm also said Dell EMC leads the integrated infrastructure systems market with a 73 percent share, up 6 percentage points from the same time a year ago.

Yet another encouraging sign: Dell paid down its loans by $7 billion over the last two quarters, faster than expected and an indication that cash flow is strong.

These are among the factors that prompt Charles King, president of Pund-IT, to declare that the combined company is “on the way to success.” King said the progress he’s looking for from this point are “a theme that believably enhances the product and service announcements, proof that the company is significantly improving its enterprise systems and storage portfolios, solid efforts in new or emerging areas like the internet of things and robust testimonials from Dell EMC partners and customers.”

On that last point, the Dell EMC World conference comes up short, at least according to the published agenda. Not a single customer is included in the lineup of general session speakers, although customers are involved in some breakout sessions.

That could be one indication that customers are reluctant to endorse the deal until they see more results. “Customers don’t have anything to worry about yet,” said Wikibon analyst Ralph Finos, “but if I’m a large enterprise EMC shop, I have to be nervous about whether a Dell-led business will provide the support that those companies need.”

What about the software?

Another question mark is how Dell will grow the software assets it acquired in the deal, including VMware and its $38 billion market capitalization. Michael Dell has promised to leave those flourishing businesses alone, and so far he seems to be sticking to his word. Pivotal, Cloud Foundry and VMware “have not been slowed down in their key development efforts and go-to market, said Holger Mueller, vice president and principal analyst at Constellation Research Inc. 

VMware, Virtustream Inc. and Pivotal, in particular, “represent the future more than traditional Dell or EMC technologies,” said Forrester’s O’Donnell. Finos added, wryly, “I just hope they don’t screw up VMware.”

So far, there’s no evidence that will happen. In contrast to some past mega-mergers that were driven by declining market share, investor pressure and even executive egotism, this one seems to have been well thought through, most analysts agreed.

“Though there have been headcount reductions, there’s no evidence of the kind of wholesale bloodletting or executive defections that have followed some other high-profile deals,” observed Pund-IT’s King.

“A private company has more latitude to invest for the long run,” agreed Forrester’s O’Donnell. “Dell is doing this, so the prospects for Dell appear brighter than other difficult combinations.”

For Michael Dell, who began by selling mail-order PCs in a market packed with hundreds of better-capitalized competitors, that would be a sweet victory indeed.

Image: theCUBE