Dell and Sun: The Time is Now

A number of months ago, I penned a blog about how HP's EDS acquisition left Dell in an IT services lurch. One of the side points in this blog was Dell's lack of enterprise credibility.... and Dell being a potential suitor to buy Sun Microsystems (It's Your Turn Dell). Fast-forward to this week, where Sun announced they would lay off 6,000 employees. Also notice Sun's market capitalization is now down to $3.1B US. If ever there were a time for Dell to scoop up Sun, this is it.

Why would Dell buy Sun? Isn't this madness? Doesn't Dell have enough problems of it's own? Yes, they do. But let's ask ourselves how Dell got into this position (and not just blame it on the current economic conditions).

The crux of my blog went back to a time when Compaq -- lacking enterprise credibility -- was in a similar situation to Dell. Here's an excerpt:

Dell’s product portfolio is lacking the power to reach into some enterprise accounts. This situation reminds me of a [compay wide] meeting at Compaq (circa 1994). The gist from executive management was that Compaq (a $20 Billion dollar company at the time) could not compete in some accounts because it did not have enterprise products necessary to win the [entire] account. In other accounts, it could only win a portion of the IT budget (those tied to x86 servers and small business storage). Compaq executives realized – correctly – that the Compaq brand lacked enterprise credibility; they needed to acquire the technology and talent necessary to compete, rather than building it internally over several years. As a result, they acquired Tandem (Non-stop platform) and DEC (enterprise services, storage, workstations, VAX, 64-bit computing, top-notch compiler team…the list is so long), which gave Compaq the goods and brand recognition to compete at an enterprise level.

Dell needs to do the same. They’re basically at the same point Compaq was in 1994. The Dell brand is lacking the enterprise punch to compete. And with more HP “feet on the street” than ever, Dell will increasingly be marginalized -- pushed out of accounts where they don’t have the product portfolio to “own the entire account”. They need to acquire the technology rather than slowly building internally/organically.

The blog went on to say that although Dell had some products in the enterprise space, they needed to beef up their server and storage enterprise credibility and that acquiring Sun would help Dell attain the credibility they need rather than waiting for Intel to push mini-computers out of the market using the x86 architecture.

Although x-86 servers make up a majority of the server market (especially in terms of units sold), for some applications, customers require systems that have a higher class of availability and performance. In this area, IBM and HP have products at the “mainframe” level (Z-Series and Superdome respectively) and the “workstation” level (P-Series/i-Series and Non-Stop/HP-UX respectively). Dell doesn’t. This problem is harder for Dell to solve. Perhaps Dell can wait for AMD and Intel to solve this product gap problem for them through the future scalability of the x86 server architecture. But another possible scenario is for Dell to acquire Sun (which could be had at a good price). This may sound like madness, but so did the HP/Compaq merger when Carly Firoina and Michael Capellas announced the plan in 2001. Today, the HP/Compaq merger is widely regarded as the right move because it gave HP the product portfolio and services it needed to compete with IBM in the enterprise. Dell needs the product punch and the enterprise brand credibility that Sun can provide.

Little did I know that the price would get much, much better.

Dell's business model has always been about draining profit pools. Dell jumps into a market when the competition has created a market with significant demand on a profit rich product. Dell MO is to come in at a lower price point, drive up tons of volume, and push the competition out of the market. At Dell, they call it "the curve". "The Dell curve" is drilled into the heads of Dell-ians from the day they walk through the front door. But many question the value of such a business model. What happens when there are no more profit pools to drain? What happens when margins are so slim that quality and support suffer? What perception does "low-cost leader" do to the brand? In enterprise circles, price is only one concern...availability, reliability, scalability, and management can be just as -- if not more -- important.

The margin-rich enterprise arena is where Sun excels. Sun has the credibility in enterprise hardware, operating systems, software, and several other technologies. The enterprise is Sun's home turf and they bring a truck-load of loyal enterprise customers.

The question is: would Dell make this move? It's a gamble to be sure. Dell would have to change their spots -- the way they operate, their mindset. Enterprise products are not made without investments in research.

From another viewpoint, Dell has the enough cash to make such a purchase. As of Friday, Dell had approximately $9B US in cash on hand, with about $2B US in debt. Sun, on the other hand, has $2.3B US in cash and $1.2B US in debt. And...one could make the argument that Dell should wait until the market recovers; Dell is in a better position to recover than Sun. But Dell has to think in terms of the compeition too. Dan Nosowitz from Gizmodo wrote an interesting blog on a CNET article concerning which PC company was best positioned to weather the current economic conditions.

I mean, what if HP or IBM bought Sun? What would Dell’s options be if that happened? With Sun off the market, who else could Dell buy to get into the enterprise game? Basically, no one. They’d have to settle for being a smaller player in the enterprise – hoping to grow the market organically (which could take years or never happen). HP buying Sun would leave Dell in an enterprise lurch they way HP's EDS acquisition did for services.

Dell missed their opportunity to buy EMC several years back and now they are kicking themselves. They should not make the same mistake with Sun. If HP bought Sun, Dell’s best option would probably be to move down market toward consumer devices. Meaning: become the best consumer gadget device company in the land because the enterprise space would be a much more difficult market to capture (Dell probably wouldn’t “give up” in the enterprise, but the road will only continue to get harder for them).

However, being a consumer device company would be difficult road too because 1) the margins are slim. 2) Discretionary consumer spending is much more sensitive to market downturns. 3) There is lots of competition from Apple, Sony, etc, where customer brand loyalty is strong. It’s much easier to drain profit pools where profit margins exist.

Dell has to make some hard choices. But, opportunity arises amid chaos.

[posted by: Drue Reeves]

Comments

[marc farley]

Dru,

I don't think Sun is a very good fit for Dell. The integration of technologies and cultural clash would be almost impossible to manage.

[Drue Reeves]

Hi Marc,

Good to see you back out here again. What's your new blog?

Sun and Dell culture clash is definitely a problem, but so was Compaq and DEC, so was Compaq and HP. Compaq was very much like Dell, HP and DEC were not. Eventually, both companies grew toward each other, but it took strong leadership to make it happen (in the case of HP and Compaq, the leadership came from the business unit leaders). Having lived through both the CPQ/DEC and CPQ/HP mergers I can tell you first hand that it wasn't easy, and not popular, but it was definitely the right move. Where would HP or Compaq be today if they had not made that move? Dell must consider the same decision. Dell takes pride in reinventing itself when the market changes....well, now is the time for reinvention....in a much more dramatic way.

BTW -- Here are some other acquisitions Dell could make:

Unisys: A services company they are already partnered with.
Accenture: The last of the large consulting Mohicans.
Symantec: Would definitely help Dell in several areas including management, storage, backup as a services, security, etc.

One could argue that a services purchase is moot because everyone who is left (PerotSystems, Unisys, CSC, Accenture) has to work with Dell because the other houses (EDS, PWC) are tied to hardware vendors (HP, IBM).

Symantec may be too expensive.

Is Sun too much of a culture clash? Perhaps, but Dell has to do something big. Small acquisitions and organic growth may keep them from achieving that 80 million dollar goal (remember that?) for years (or ever).

[Tarry Singh]

I have long written that other firms, not necessarily HW vendors ut also coming from the SI angle, should focus on completing the circle and focusing on more of a one-stop-shop model with globally deliverable converged services model. This however was about Cisco's move to acquire EMC, which has the same challenges. Its global strategy is weak, it's portfolio is large and it needs some trimming for sure(http://tarrysingh.blogspot.com/2008/08/m-real-time-analysis-why-would-cisco.html)

HP is definitely following the path to go after some. IBM is the leader in many quadrants (itsg, itsm, gsc etc) and soon I expect to see some new, in-organic mergers coming from other industries.

Coming to Dell. It has several options, it's move to cannibalize the SME segment will work, its push up to the enterprise market will have to call for some strategic merger. Sun, unfortunately is not one of them. Scott has been trying to sell Sun to Oracle and has done his best. Jonathan is under tremendous pressure from their VAR ecosystem.

So, Sun is stuck in the middle, Dell is more on a centripetal path and will have to look for other mergers. CSC, Accenture may be good from the services perspective.

Symantec is expensive but ripe. I do predict that Symantec will eventually be bought by MSFT.

Do remember one thing: Its all a Data Center rush and many vendors are changing their roles like chameleon. I am expecting a lot of disruptive interventionism from players outside the IT industry as well.

/Tarry

[Used/Refurbished laptops]

I have been reading about how the laptops have been delayed going back......what a couple of months? But no one has said anything about the desktops w/LCD monitors. You got to be kidding when you dont have one of the most popular items people want with there desktop. I ordered mine on 8-9-07, delayed to 8-20-07, delayed to 8-27-08 and now currently delayed to 9-4-07. When I woke up this morning I said to my wife "How much do you want to bet I get an e-mail from Dell that the PC will be delayed AGAIN?" Then when I called in to keep my PC on backorder, I wanted answers to my questions and the lady must of gotten annoyed with my questions and handed her headset to the person next to her. That person was VERY RUDE!!!! I ended up hanging up on her. I bought my first computer from Dell in '98, next one in '03, and now '07, but may not get it until '08.

[used computers]

I don't see a even single clue of acquiring Sun by Dell, As Dell has economical crisis and i don't think Dell like to induce itself with yet another issue by acquiring Sun.

[cheap computers]

As Compaq was decline in the marketing and it was almost bankrupted but merging itself to Hp it had made the best decision now both work together and doing good in marketing.

[used computers]

the Compaq brand lacked enterprise credibility; they needed to acquire the technology and talent necessary to compete, rather than building it internally over several years.