Dell-EMC deal poses questions for Mass. tech industry

Companies downplay need for layoffs; fate of VMware has some wary

The complicated $67 billion purchase of EMC by Dell gave observers, both optimists and pessimists, plenty to consider. KAYANA SZYMCZAK/GETTY IMAGES

EMC Corp.’s sale to Dell Inc. leaves a long list of unanswered questions for employees and the broader Massachusetts technology industry, amplifying the region’s long-running anxiety about falling behind West Coast competitors in one of the economy’s most dynamic sectors.

The deal, valued at about $67 billion when announced early Monday, follows a long period of uncertainty about EMC’s future. The Hopkinton company has been battling an activist shareholder’s call to break up its collection of businesses and searching for a successor to longtime chief executive Joseph M. Tucci, all while struggling with increasing competition and a slowdown in sales growth.

“Ultimately, it’s a good ending to a bad situation,” said analyst Daniel H. Ives of FBR Capital Markets & Co. “The last three years has felt like, as an investor, navigating through a dark rain forest with no flashlight.”

Still, it’s not clear that EMC’s fortunes will improve under the control of Michael S. Dell, who is trying to make his company one of the largest tech providers to corporations in the world.

Since its founding in 1979, EMC has grown into a powerhouse in the data- storage sector, a critical but relatively obscure part of the tech industry.

Its core business is selling data-storage devices, refrigerator-size cabinets loaded with disk drives, networking gear, and software. Those devices serve as the digital memory banks for the big computer networks run by companies.

While the overall tech market is growing, EMC has battled shrinking demand for its storage products, both because of competing technologies and the rise of cloud computing, which lets potential EMC customers rent space in data centers that are run by companies like Amazon.com Inc.

On Monday, Tucci acknowledged the pressures of trying to maintain stock growth on the public markets, saying the plan to make EMC part of privately owned Dell would allow the company to plan for the long term rather than the next quarter’s sales reports.

He noted that the per-share sale price of EMC of $33.15 was higher than the stock had traded in nearly 15 years.

“It’s been a long slog,” Tucci said.

Management from EMC, the state’s largest tech company and one of its biggest employers, and Dell downplayed the threat of layoffs as a result of the merger.

While acknowledging that there could be some job cuts, the companies said they plan to grow the Massachusetts portion of their operation in the coming years. EMC employs about 9,700 in the state, and about 70,000 worldwide.

“We expect this to be the headquarters of a major, $30 billion-plus business, which is growing,” said David Goulden, the head of EMC’s data-storage division. “We are committed to over time making sure that we grow our head count in Massachusetts.”

By combining, Dell and EMC are able to put segments of the IT market together under one roof. Dell, which made its name selling PCs to consumers in the 1990s, has been reinventing itself as a supplier of servers and other business computing gear.

Elliott Management Corp., the hedge fund firm that had been pushing EMC to break up for about a year, said it backed the deal.

EMC stock finished the day at $28.35, a rise of less than 2 percent. Shares of VMware Inc., a publicly traded server software company that is 80 percent owned by EMC, lost 8.1 percent in the day’s trading, finishing Monday at $72.27.

VMware’s slack price probably reflected general uncertainty about its future, along with potential unease about the complicated structure of the deal’s financing, which included a new “tracking stock” offered to EMC shareholders that will be sold separately from the main VMware stock.

Others were skeptical about how well the tie-up would function and whether the deal was a good one for shareholders.

“It’s just a funky structure,” said Jason Ader, an analyst with William Blair & Co. “I think it’s confusing for a lot of people to figure out what this all means.”

For their part, Dell and EMC management said they did not intend to split VMware off from the main company, with Tucci saying that Dell “intends to be a bigger owner of VMware over time.”

Chris Lynch, an IT industry veteran and partner at Cambridge venture capital firm Accomplice, said having the privately financed Dell in charge of EMC’s business was less reassuring than if IBM or another large, established business computing company had taken over.

“They built a real company based on real value delivered to the market. And the shame of it is, now we have a financial engineering project,” Lynch said. “If you tie two boulders together and throw them in the ocean, they just sink faster.”

Steve Duplessie, senior analyst at Enterprise Strategy Group in Milford, said questions would continue about whether Dell plans to spin off VMware or other EMC assets.

“There’s no way that thing stays completely intact. It’s just a matter of time before pieces are stripped off,” he said.

Although seeing EMC sold off is sure to cause distress among civic leaders and tech industry officials far beyond EMC’s headquarters in Hopkinton, Duplessie said the company’s strongest assets had long ago shifted toward Silicon Valley, following the general migration of the technology industry.

VMware is headquartered in Palo Alto, Calif., and even much of EMC’s core storage engineering had migrated west in recent years, Duplessie said.

“So, there’s no big change,” he said. “There will always be some tech here, and every West Coast company has some people here because there are brains here. As long as there are schools spitting out brains, there will always be local opportunities for global companies. Everybody wants to be here.”

Venture capitalists who invest in new tech companies may find a silver lining, however. Entrepreneurs and investors who bankroll startups have long complained that EMC has been too staunch a defender of its noncompetition contracts, which limit the kinds of companies former employees can start or work for.

If EMC’s changes cause some talent to flee, they could start the clock ticking on escaping those noncompete clauses and start their own companies, VCs said.