The Wall Street Journal is reporting that a merger of sorts is in play between Dell and EMC Corporation (EMC).
O
n the surface it looks like a combination of two companies that are incapable of creating growth. However, a deeper look unveils major growth and cost-cutting opportunities from an EMC merger that could be bad news for companies like Hewlett-Packard (HPQ) and International Business Machines (IBM).
EMC, Dell, and Possibilities Galore
The details surrounding this proposed merger are still very sketchy, with CNBC reporting that Dell would have to pay north of $27 a share, and the WSJ suggesting that Dell may only be interested in “parts” of EMC.
Beyond that, who’s to say that EMC is not pursuing Dell?
Regardless, if Dell acquires EMC or picks off its best parts, there isn’t much investment upside beyond the short-term buyout pop that is likely already priced in EMC stock. However, if EMC acquires Dell, it could be a different story.
Further, the Dell and EMC merger would be bad for the likes of HP and IBM.
Why EMC Merger Is Bad for HP Stock
While Dell is seen primarily as a PC and printer company, and EMC a storage company, the underlying upside within this merger would be cloud IT and enterprise synergies. The worldwide cloud IT infrastructure market is expected to grow 26.4% this year and top $33 billion in value. By 2019, it is expected to be a near $55 billion market.
Currently, HP is the market leader, with a 16.3% share of the industry, and Dell is second with an 11.1% share. Notably, Dell’s market share increased from 10.6% in the comparable period last year, as Dell produced year-over-year growth of 31.5%, according to IDC.
While HP maintains a big lead over Dell right now, Dell operates in many of the same enterprise markets as HP and poses the greatest single risk to HP’s leading presence in cloud IT.
If Dell and EMC merge, Dell would then become the market leader, grabbing more than 18% of the market. Dell would likely find cost synergies between EMC and its own cloud IT businesses, and importantly, could combine EMC’s best-in-class enterprise storage products with its own presence in the public and private cloud with server products.
In other words, EMC plus Dell equals a legitimate threat to HP stock’s thriving cloud IT business.
Merger Could Exacerbate IBM Stock’s Struggles
Moreover, the pair equals more bad news for struggling enterprise vendor IBM.
While IBM has made many investments in the cloud, it lacks a large cloud IT presence, and remains largely an on-premises IT service provider. A couple years back, Stanley Druckenmiller called IBM a great short, and said that every dollar gained in the cloud is multiple dollars lost for on-premises IT providers like IBM.
Druckenmiller has largely been right, as IBM’s cloud infrastructure services business has grown but its core on-premises IT business has consistently weighed on overall sales.
That said, Dell, HP and IBM all compete for many of the same customers, and a Dell or EMC merger makes a significantly larger and more complete end-to-end IT service provider than either alone.
That’s bad news for IBM stock.
The Bottom Line
This story has many moving parts, with the most meaningful being who buys what and for how much. With Dell being acquired for roughly $25 billion back in 2013, it would be hard for a $40 billion EMC to complete such a purchase.
However, EMC still owns 80% of VMWare (VMW), an asset that could come in play while also being crucial to the merger’s competitive edge with ongoing growth and a leading enterprise presence in server virtualization.
In fact, VMW is yet another piece of the EMC-plus-Dell puzzle that could play a significant role in how this all shakes out.
Nevertheless, EMC stock jumped more than 4% behind the news of Dell’s interest, and there may not be much more upside if a Dell offer is made.
However, if EMC acquires Dell, and is not forced to sacrifice too much of its stake in VMW, that could drive long-term stock gains because of the potential in cloud IT.
Regardless of what happens, EMC and Dell seem like a good match, whereas IBM and HP stock investors should be hoping that the deal falls apart.
As of this writing, Brian Nichols owned shares of HPQ.
