There are some rumors today emanating from the financial community about Dell potentially acquiring Brocade. The Brocade acquisition rumor happens once every few months, and Dell always gets included in the bucket of viable acquirers. However, if I am Dell, it just doesn’t make sense to spend in the neighborhood of $5 billion to buy Brocade.
First off, even if a deal was imminent, I would try and push it off until after the upcoming Dell Storage Forum. By announcing a Brocade deal it would dilute every other major message (e.g. “The virtual era is fluid”) the company is planning for the show. Beyond this very tactical reasoning; however, this deal doesn’t at all align with Dell’s customer & product focus, recent M&A history or their outward strategic positioning.
From a customer segment perspective, Dell is best equipped to sell to SMB and SME customers. The company has never successfully penetrated the high-end. They have never had Unix servers, and now with EMC on the out, they don’t have a high-end enterprise storage offering. But if you look under the cover at Brocade’s installed base (including McDATA), the strongest ASP and gross margin contribution comes from the high-end. Moreover, a large piece of Dell’s non-EMC storage run rate is now EqualLogic. Last time I checked, these boxes don’t drag a lot of Fibre Channel switches or directors.
From a product standpoint, Dell has never been a big seller of Fibre Channel switches. The Brocade installed base is instead dominated by IBM, HDS, HP and EMC storage. So while Brocade brings a nice relative gross margin structure (~63%) compared to Dell (23.4% in most recent quarter), they also get upwards of 50-60% of their revenue from OEMs not named Dell. If Dell were to buy Brocade, there is a real risk that Brocade’s OEM customers look to increase sourcing from alternative vendors. Brocade is not VMware. OEMs are not going to sit back and accept the fact that Dell is making 65 points on every switch they sell them. They are going to look for alternatives. The potential risk to the acquired revenue stream alone makes it difficult to justify a transaction. Finally, beyond the revenue risk that Dell would be inheriting, Brocade also is still sorting through the aftermath of an extremely challenging integration of Foundry.
Recent M&A efforts (see below) are also not indicative of a company focused on building solutions for the high-end enterprise. Below is a list of Dell’s M&A since hiring Dave Johnson away from IBM in mid-2009:
- SecureWorks 1/4/11 – managed security service provider
- Insite One 12/22/10 – cloud-based medical archiving
- Compellent 12/13/10 – midrange Fibre Channel storage
- Boomi 11/2/10 – cloud messaging/integration
- Scalent 7/11/10 – data center infrastructure automation/provisioning
- KACE 2/11/10 – systems management and deployment appliances
- Exanet 2/8/10 – clustered NAS
- Perot 9/21/09 – IT services
This list of acquired assets is a company focused on building solutions for the SME/SMB and cloud customer set. This is a company with aspirations of evolving to an SMB/SME-version of IBM. Having lost out on the 3PAR bidding, the company appears more convicted on this strategy now than ever before.
Finally, unless Dell’s has all of a sudden shifted strategy, acquiring Brocade would be 100% against the company’s publicly stated positioning. See the below back and forth between one Wall Street analyst and two Dell execs (including Michael Dell) on the Feb. 15, 2011 earnings call transcript.
- Sellside Analyst: An architecture question regarding large enterprise for Michael or Steve. I guess do you have a view on the consolidated stack versus best of breed point solutions? Does it matter for Dell or do you have a road map in place that you can speak with customers about?
- Steve Schuckenbrock (President, Dell Services): Well, I think we’ve been pretty clear that we think open wins and we think it’s really important to make sure the choice is preserved for our customers. We’ve built a strategy around what we call open, capable and affordable. And that means that we preserve customer’s choice. We innovate at every layer of the stack, and we drive for total cost of ownership as the key metric that our customers care about. Now, when we talk about open, it’s very clear that our customers can benefit from how each of those layers gets integrated together. And so we are offering solutions that have servers, have storage, have network capability bonded together and can be sold as a unit to a customer. And that unit can be bought in increments of say 50 virtual machines, or 100 virtual machines, or whatever the case might be, scaled quite nicely with the customer’s business. And so frankly with Dell you can get it integrated or you can continue to – and you can continue to preserve your choice at every layer and we think that option and that flexibility is one of the critical things we do better than any of the competition.
- Michael Dell (Chairman & CEO): And I would just point out, there is something kind of wrong with some of the rhetoric that’s being put in the industry. You know I think if you go do your own research, what you’ll find is that the larger the customer will – the larger customers will absolutely tend to prefer more best of breed. Which is sort of exactly the opposite of the rhetoric that you’re hearing or being sold from some others in the industry.
Clearly Dell has chosen to counter Cisco and HP’s convergence push with a more open, modular and best-of-breed piece parts approach. Why? Because Dell has decided to focus on target customer sets (SMB/SME, web-scale/cloud) that aren’t asking for the “iPad of the data center”.
In the web scale/cloud space in particular, Dell has not received enough credit for what they have accomplished so far. Within their DCS division they have very effectively re-run the old build-to-order PC model that the company was founded on. Based on metrics from Dell, tailoring compute, storage and networking piece parts to the unique needs of Web 2.0/social media customers has landed them in 22 of the top 25 clouds.
All things considered, if I am Dell and I have $5 billion to spend, it won’t be on Brocade. Why inherit the merger integration risk, revenue risk and continued Foundry integration risk. Why acquire a company that contradicts my entire strategy and doesn’t align with my installed base? It doesn’t make sense, but maybe I am being too logical.
