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Tucci on Dell-EMC acquisition: We know what we're doing

Although financial factors have deteriorated since Dell's $67 billion acquisition of EMC was announced, EMC's CEO said the megadeal is on track to close in 2016 as planned.

EMC CEO Joe Tucci today admitted aspects of the planned $67 billion Dell purchase of EMC cause him "angst." Still, he expects it to go through under the original terms and time frame disclosed last October.

Tucci said he is fully confident despite speculation that the Dell-EMC acquistion could be in trouble because of financial issues.

"This is a really big deal. And there is a lot of noise in the system," Tucci said during EMC's quarterly earnings call. "And there are a lot of people with lot of opinions. And a lot of them are not based on a lot of facts. As we are doing this, there's tremendously increased market volatility, and I think it's really fair to say that this environment has not been kind to any security. What gives us strength is that we have a binding solid merger agreement in place. We are highly confident in that we will meet the contractual terms in place. There are significant penalties in place both ways if this doesn't happen. The banks are fully committed. They have told us they can raise the money.

"So we're confident. We know what we're doing."

Main barriers to the Dell-EMC deal

There are roadblocks to the deal as you would expect with a $67 billion acquisition. The share prices for EMC and EMC-owned VMware have dropped since the merger was announced last October. Along with rising interest rates, the decline in share prices has raised speculation that Michael Dell and his partner Silver Lake Partners will not be able to raise the $40 billion to $50 billion required to finance the deal. That speculation grew this month when Symantec reduced the sales price of Veritas to the Carlyle Group from $8 billion to $7 billion after banks failed to raise the required debt.

EMC's stock is hovering around the $24.05 share price that Dell is expected to pay for the company, indicating shareholders lack confidence that the deal will go through. VMware has lost much of its value, with its shares falling from $82.05 a week before the deal was announced to $46.16 at today's opening.

Layoffs at EMC and VMware to help control costs ahead of the deal are taking its toll on morale. There is also an expectation that customers might be reluctant to buy EMC storage products because of the uncertainty created by the deal. EMC today reported storage product revenue of $4.65 billion for last quarter, down 4% from last year.

Disappointing storage sales was one of the main reasons for EMC's less-than-expected $7 billion in total revenue, which was flat from a year ago. For the full year, EMC storage revenue of $16.3 billion was down from $16.5 billion in 2014.

Joe TucciJoe Tucci

"Personally, I can tell you, a deal at this size causes angst," Tucci said. "You have to take an extra lap around the track to explain. Customers and your people are the important audiences, and once you get them to understand what we can create here, you get a positive effect. We think this merger's in the best interests for all parties. As we get into it more and more, it's becoming better understood."

The deal still needs approval from shareholders and U.S. and foreign regulatory bodies. But Tucci proclaimed it will go through "under the original terms and the original timeline," between May and October of this year.

Tucci, who will step down after the Dell-EMC acquisition closes, said he is confident that Michael Dell will have a positive impact on VMware as its largest shareholder.

EMC executives said they are on track to meet their goal of $850 million in cost reductions and hit their target of $50 million reductions in the fourth quarter of 2015.

CFO Zane Rowe said most of the $50 million came from "non-headcount" reductions. Still, EMC will cut thousands of jobs and VMware Tuesday confirmed plans to lay off 900 employees, or 5% of its workforce.

Tucci tried to play up positives of the deal, which he said will result in an IT behemoth with $80 billion in annual revenue. He said that is the type of company needed to succeed in today's IT world, and a vendor that only sells storage will struggle.

"I believe as you get to a certain size, playing in storage alone one is not a good strategy for the future," he said.

We're confident. We know what we're doing.
Joe TucciEMC CEO

Still, EMC Information Infrastructure (the company's storage group) CEO David Goulden said the vendor will be busy with storage rollouts over the next few months, mainly dealing with flash. Goulden said EMC will unveil new re-architected all-flash versions of its VMAX enterprise and VNX midrange arrays and launch its DSSD flash shared storage product.

"We believe all-flash should be the standard for primary storage systems in 2016," Goulden said.

Goulden said EMC's all-flash XtremIO has been a bright spot in storage sales, generating $1 billion in revenue in 2015. He said XtremIO revenue for the fourth quarter alone was more than any of EMC's competitors' all-flash platforms over the past year combined.

Goulden said part of the reason for worse-than-expected storage sales was customers are waiting for the platform refreshes EMC is promising. But he said there is "not a lot of overlap" between EMC and Dell storage products and "where there is overlap, we will make sure customers are looked after and we'll have a roadmap for all of those products."

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