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Dell talks shopping in Davos

$13.4bn $7.4bn to burn

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Everybody wants to know what Dell is going to do to build up its business through acquisitions, but founder Michael Dell is only talking in vagaries, as is the norm at the World Economic Forum in Davos, Switzerland.

Dell – the man – was on hand for the Forum, and took the opportunity to take a swipe at rival HP while at the same time hinting that Dell – the company – was itching to do some more acquisitions to get a bigger slice of the IT-spending swiss roll. And every time Dell, which has partnered to drive servers and adjunct hardware sales (in storage and networking in particular), buys something to boost its business, it seems to alienate another set of partners.

If you are damned if you do and damned if you don't, then you might as damned well do. And do it damned well.

At the end of November 2010, Dell had $13.4bn in cash and equivalents to play with, or $7.4bn if you feel like netting out short-term and long-term debts, and it has been relatively conservative in acquisitions in 2010.

Speaking to Bloomberg, Michael Dell said that his company "showed good discipline" and did not "take an emotional decision" in its bidding war for 3Par last year, which HP finally won by shelling out $2.4bn for the maker of highly sophisticated disk arrays.

That amount was a hefty 3X premium over the value of the company before Dell came in and offered $1.15bn for tit, which was twice its market value before Dell started shopping. Dell told Bloomberg that HP paid "way too much" for 3Par, a sentiment that is hard to argue with. But HP had its reasons, most of them being that Dave Donatelli, who came into HP from EMC and who now runs its Enterprise Servers, Storage, and Networking business, wanted to do a big deal and didn't want to lose one to Dell.

Dell waited a few months to make its bid for Compellent, which worked out to $820m net of Compellent's cash, and got its hands on a reasonably sophisticated storage array to complement its EqualLogic, PowerVault, and Clariion arrays.

The latter are products that come through a long partnership between EMC and Dell, where Dell manufactured low-end arrays and sold them on behalf of EMC to its PowerEdge server customers. That was before Dell bought EqualLogic and Compellent, of course.

In a question-and-answer session with Wall Street analysts yesterday, Joe Tucci, EMC's chairman and CEO, basically said the Dell-EMC partnership was toast.

"Let me do it this way," Tucci said in his usual gruff manner. "For sure, our relationship with Dell has moved from strategic to tactical. For sure, it's now mainly competitive. To give you some evidence of that fact, the Dell OEM business with Clariion - our Clariion business to Dell that they OEM - was down to approximately $55m in Q4."

Tucci added that the fourth quarter was historically a strong one for the Dell-EMC storage partnership, and said further that the companies had sold storage to "thousands and thousands" of Dell shops, and that those companies expected Dell and EMC to work together.

The Dell salesforce expects to sell a lot of EqualLogic and Compellent products, no matter what Tucci has to say about it.

And EMC is partly to blame here, too, since it was EMC and its server-virtualization minion, VMware, that partnered with networking giant and server wannabe Cisco Systems to help push integrated Vblock stacks of Cisco blade servers and networks with EMC storage and management tools and VMware virtualization.

EMC could have done Vblocks with Dell years before Cisco came on the scene, and did not. Years ago, Dell needed credible storage and got it, and EMC needed cheap manufacturing and a way into the entry x64 server space and got it. So the Clariion C|X partnership was successful on its own terms. But there is little chance that Dell is going to be a reseller of the new VNX and VNXe arrays just launched by EMC, as Tucci explained.

Although Dell has said that it wants to double its enterprise revenues by 2014, the company doesn't seem to be inclined to do big deals, despite having shot a big wad of its cash to buy IT services company Perot Systems in September 2009 for $3.9bn. (The doubling was against the IT spending by Dell's corporate customers in the wake of the Perot Systems deal, so that is a significant statement.)

Last year, Dell spent a relatively modest sum on the acquisitions of Scalent and Kace (systems management), and Exanet, Ocarina Networks, and Compellent (storage). Steve Shuckenbrock, who now runs Dell Services, used to run the Large Enterprise business unit, and said that Dell was looking to expand into regional services, particularly in China, and was also looking to do deals in particular verticals, including financial services, healthcare, and education.

That sure doesn't sound like Dell will be looking at the current market capitalization of cloudy infrastructure provider Rackspace Hosting, which stands at just over $4bn, and thinking that it might shell out $5bn or so to take control of this well-regarded hosting company.

Rackspace is working with NASA and a slew of cloud-fearing, cloud-loving IT giants on the OpenStack cloud management fabric, and would give Dell a different kind of services business. And, one might point out, a business where the bespoke server designs in the Data Center Solutions business might give a combined Dell and Rackspace an edge.

But Dell is probably too happy selling custom servers to Facebook to worry about building clouds or alienating Amazon, Microsoft, Terramark, GoGrid, Savvis, and a slew of other hosting providers that are gussying up their data centers to make them cloudy.

But, then again, an argument can be made that Rackspace is a good fit for a Dell that wants to be a player in the cloud era.

Ditto for Platform Computing, a pioneer in supercomputing grids that has a set of products called Symphony for gridding up financial-trading applications, and another for playing traffic cop on heterogeneous compute clouds, called Infrastructure Sharing Facility. Platform also has a tidy HPC software business selling its Load Sharing Facility for tradition clusters, aimed at running scientific simulations.

There are any number of companies that Dell could be interested in buying, and a lot of them are small companies that do specific jobs to help run virtualized computing environments. You could make a case for Dell buying Citrix Systems, although it is a bit pricey with a $12bn market cap. A similar argument could be made for Red Hat, with an $8.15bn market cap. Both of those companies are way too expensive, but not outside the realm of possibility.

Any number of network equipment providers - Juniper Networks, Mellanox Technologies, Brocade Communications, Extreme Networks - could be on Dell's shopping list. But Juniper, at a $19.4bn market cap, is out of Dell's price range; Brocade, at $2.69bn, and Mellanox, at $886m and in the process of eating Voltaire, might make sense.

But the revenue streams of Brocade and Mellanox are spread across the system vendors, which are Dell's rivals, and that makes acquisitions touchy because you can't predict how server competitors will react.

Because servers are inherently interesting to me and because I like to see lots of variety in the server racket, I think Dell would be smart to take a very hard look at Super Micro. That company, which sells motherboards and other system components as well as whole systems as well as machines that others OEM and rebrand, is getting set to break $1bn in sales next year and has a market cap of a mere $511m right now.

Super Micro is not hugely profitable, but it knows a thing or two about building system boards and servers alike – and if anyone is going to start eating into Dell's profits, it's Super Micro. It may make sense to sell bullets to the whitebox vendors while at the same time selling a broader line of systems with the Dell brand on them.

You could also make a case for Dell expanding into HPC by acquiring Cray or SGI, which are relatively cheap at $263m and $333m market caps right now. SGI is the better fit of the two. But Dell has not shown much interest in top-end, grand-challenge HPC machines, and might do better to ride the GPU wave with the kinds of dense machines it has come up with as well as the very clever ones made by Appro International and Super Micro.

It is hard to see how Super Micro or any of the HPC players would boost revenues by much and none of them would likely help the bottom line, even in the long run, compared to what Dell can rake in selling its servers, storage, networking, and maintenance.

You can see now why Dell has been picky about the price it pays for acquisitions, and why it has been so hot to trot on storage. Those were easy acquisitions. The ones Dell has to consider doing now are expensive, hard, and sure to alienate at least some key partners. All that Dell – the man – said to Bloomberg was that the company was looking to do acquisitions in software, cloud computing, storage, virtualization, and data centers. Notice that he didn't say servers? ®

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