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Massive tax bill increases uncertainty in Dell-EMC deal

Dell's deal to buy EMC and VMware for $67 billion is in doubt after revelations that the company could face a $9 billion tax bill, forcing some uncertain IT buyers to look elsewhere.

It's not clear how many unhatched chickens Dell, EMC and VMware officials had counted before the landmark acquisition deal became official, but they may have to start that count again.

The proposed $67 billion deal, which already has a healthy number of skeptics, appears to have run into an unexpected hurdle centered around a $9 billion tax bill that could scuttle the deal.

The deal, not expected to be final until mid-2016, still has a number of regulatory hurdles to clear. But the revelation that the enormous tax associated with VMware tracking stock -- created as part of the acquisition -- could introduce more questions for IT buyers in the process of deciding whether to sign contracts or not.

"For people in an enterprise IT environment, in a buying or upgrading phase, this is not an easy checklist item for them," said Dana Gardner, principal analyst at Interarbor Solutions LLC in Gilford, N.H. "Now, they now have to do more homework and start thinking about Wall Street issues instead of technology issues."

Gardner added that CIOs' initial wariness of the deal's strategic validity figures to only deepen with this latest development.

"This is not good for business now or going forward, whether you are Dell, EMC, VMware or other members of the [EMC] Federation," he said.

While there may be possible taxes incurred from the VMware tracking stock, it will not affect the availability of products, he said.

Richard Fichera, vice president and principal analyst at Forrester Research Inc., in Cambridge, Mass., chalked up much of the concern about the tax burden squashing the deal to "financial press speculation." He believes the latest reports that the deal may be killed, or restructured, will have very little "tactical impact" on IT buyers.

"This is a nonissue," he said. "If you are buying EMC products today and you are happy, you keep buying them."

If the deal doesn't happen, IT pros can continue to buy EMC products. EMC is a profitable company and it will continue developing new products in its core storage business even if the deal doesn't happen, he said.

A few of his clients have asked about the deal, mostly with general questions. Many of them have lived through other large deals in the past, including HP's purchase of Compaq, IBM's sale of its x86 server business to Lenovo and the recent HP split.

"I think people are getting pretty thick calluses when it comes to corporate restructuring," he said.

The latest development hasn't prompted many new inquiries from clients, Fichera said, just a handful of them wondering what the deals means for them.

"My advice has been business as usual," he said. "This isn't going to influence your tactical decisions."

Since the deal will not be finalized until mid-2016, there will be months and months of uncertainty about whom and what is part of the company -- a company that would be an essential ingredient in an enterprise's data center, according to Gardner.

"You can't have this dark cloud hanging over the whole portfolio quarter after quarter," he said.

HPE, cloud ready to catch the Dell-EMC deal fallout

If the deal does fall through, it could put EMC back out on the street, shopping itself around. Hewlett Packard Enterprise (HPE) might be interested in jumping in to take Dell's place, Gardner said, but not until EMC splits off VMware. HP's interests would be different than those of Dell, however, given Dell's interest in gaining a stronger foothold in the enterprise -- something HP already has.

"HP could be more interested in RSA Security LLC and Pivotal Software Inc., but far less interested in legacy EMC storage, which it is doing a good job now of disrupting with 3PAR," Gardner said.

If the deal collapses, it could become a generous opportunity for common competitors of the three companies, including Amazon Web Services (AWS). Not only could users decide to switch vendors, but it could change their plans about going with the hybrid cloud strategies -- something heavily favored by VMware and Dell -- and veering toward a public cloud strategy, such as AWS.

"Someone like Amazon can walk in with a rate card the size of a postcard and say, 'This hybrid cloud has become much more complex due to this financial situation at Dell; why don't you come to the Amazon [public] cloud,'" Gardner said. "This is handing competitors like Amazon a gift."

While the new financial development adds more complexity to the proposed deal, Andrew Smith, a software analyst with Technology Business Research Inc., in Hampton, N.H., expects the deal to be approved. Smith added, however, the deal gives VMware a better chance at success than Dell's software division.

"What the merger will do is unlock more opportunities for VMware just because VMware will have more access to Dell's partner network and [small and medium-sized business] users, as well as gain some solid footing with its [end-user computing] portfolio."

Comparing VMware and Dell's software portfolios, Smith noted that Quest, which Dell purchased three years ago, has some virtualization capabilities; as does Wyse, a company also purchased by Dell. He said adding VMware into that mix would make identifying "where the value lies a bit harder."

However, the latest stumbling block might give Dell a chance to sell off some of the overlapping technologies as a way to pay off the $9 billion tax bill.

"What is interesting is if this gives Dell a chance to shop around parts of the software portfolio that aren't critical to the whole deal," Smith said. "A yard sale could be the way to finance some of the debt and their software would be right in the crosshairs for that."

Ed Scannell is senior executive editor for TechTarget's Data Center and Virtualization media group. He can be reached at [email protected]

Robert Gates covers data centers, data center strategies, server technologies, converged and hyper-converged infrastructure and open source operating systems for SearchDataCenter. Follow him on Twitter @RBGatesTT or email him at [email protected].

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