July 12, 2017

Dell struggling after EMC purchase

EMC's former headquarters in Hopkinton.

July marks one year since Hopkinton data storage company EMC's shareholders approved an acquisition by Texas computing giant Dell. The $67-billion deal closed last September, so the new partnership is still in its very early stages, but early indications are that the arrangement hasn't yet fared well, said Will Mitchell, a professor of strategic management at the Rotman School of Management at the University of Toronto.

"It doesn't mean that he can't turn it around, but it better happen fast," Mitchell said of Dell Founder, Chairman and CEO Michael Dell.

Dell's losses have actually only grown since the EMC deal went through. The company lost $1.5 billion In the first quarter of fiscal 2018, which ended in May. In the same quarter the year prior, Dell lost $139 million.

For the fiscal year that ended in February, Dell had a net loss of more than $3.7 billion. For the prior year, it lost $1.2 billion. The company was taken private in 2013 but still reports its financials.

Dell losing both revenue and profitability is a deadly combination, Mitchell said, and was under pressure to grow and differentiate itself from competitors. EMC, with $2 billion in net income and 70,000 employees, provided an opportunity. The company's revenue had grown in five years from $17 billion to $25 billion and was reliably profitable.

Dell's acquisition of the 37-year-old company was called the largest tech merger in the industry's history, and Dell saw it as a chance to capitalize on the growing cloud-computing sector.

Paul Vigna, a Wall Street Journal columnist, said at the time that investors weren't especially confident.

"It's a big bet for both companies, which are struggling to make a future for themselves in a world that has largely left PCs behind for mobile," he wrote. "Dell hasn't really been the same since the days of 'Dude, you're getting a Dell.' EMC traded for more than $100 a share at the height of the dot-com boom. Today it is barely a third of that."

Despite Dell's debt from the deal, research-and-development costs rose sharply. But the larger Dell Technologies, as the post-EMC merger company is known, has not grown revenue to be larger than the sum of its parts, Mitchell said.

Dell contested that the marriage has got off to a rough start.

EMC and a subsidiary, VMware, did not fully transition to Dell's fiscal calendar until February 2017, spokeswoman Lauren Lee said. Dell's budget calendar runs from February to January.

"Therefore, any attempt to conduct year-over-year analysis just 10 months into the combined company's first fiscal year is meaningless," she said.

The only accurate year-to-year comparison that can be made so far, Lee said, is Dell's PC business, the Client Solutions Group, which maintains the same business structure and has posted 17 straight quarters of growth and market-share gains. GAAP, or generally accepted accounting principles, results also don't fully capture the company's performance, she said. Several accounting adjustments fall into non-GAAP accounting, she said, including substantial non-cash adjustments such as for product development that will continue for several years after the acquisition.

EDITOR'S NOTE: This story has been edited to include comments from Dell.

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