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Summary:

[qi:012] The skirmishes that have been taking place between Hewlett-Packard and Cisco as each tries to encroach on the other’s territory in an effort to own both the enterprise and consumer IT markets have been heating up over the past year. HP has been strengthening its […]

[qi:012] The skirmishes that have been taking place between Hewlett-Packard and Cisco as each tries to encroach on the other’s territory in an effort to own both the enterprise and consumer IT markets have been heating up over the past year. HP has been strengthening its ProCurve line of enterprise networking products, an area where Cisco dominates. Meanwhile Cisco has moved into one of HP’s traditional markets with the launch of its own enterprise servers, dubbed the Unified Computing System. That prompted HP to retaliate by inking a deal with Riverbed, long one of Cisco’s data networking archrivals.

As I’ve argued in the past, there are still other moves that HP could make to fend off Cisco in enterprise IT. But those would be rendered moot if Cisco decided to pull the ultimate offensive move — that of buying Dell.

The Math

Even in the face of the current economic downturn, Cisco could afford to buy Dell. It had some $41 billion in cash and assets as of the end of its latest fiscal quarter, though it would likely look to buy Dell using a combination of cash, debt and stock. The combined market capitalization of Cisco/Dell of around $150 billion would easily trump rival HP’s $96 billion.

The margins on Dell’s products are much thinner than Cisco’s have traditionally been (17 percent vs. Cisco’s 64 percent in their two most recent quarters, respectively), but combine the two and you have a very profitable business. My rough calculations — without taking any potential merger synergies into account — put a combined Cisco/Dell at $20.4 billion in top-line revenues per quarter with $7.3 billion in gross profits (36 percent). I am willing to bet that with synergies the combined company would have gross profits of over 40 percent — compared to HP’s most recent quarterly gross profits of just 24 percent.

The Products

In a move to further penetrate the consumer market, Cisco recently purchased Pure Digital Technologies, maker of the Flip Video camcorders. In the meantime, it’s seen good growth in its Linksys consumer networking products -– at least in areas where they compete with HP. However, while those products are a step in the right direction for Cisco, they won’t help the company win out against HP. But if Cisco bought Dell, it would get a wealth of consumer products that are directly competitive with HP’s, among them laptops, desktops, printers, digital cameras, monitors and more. Increasingly, all of these devices need to be networked together in the home, and Cisco has the technology to do that in spades.

Beyond the strategic fit on the consumer side that would result for Cisco, such an acquisition would make good strategic sense for Dell, too. Dell has always wanted to be a major player in enterprise IT, a traditional market for rival HP. To that end, the company has its PowerConnect enterprise networking products, and at the start of the year announced a partnership with Cisco focused on the next generation of data center switching — a partnership focused on battling the common enemy of HP.

In the meantime, Cisco unveiled its first enterprise servers with its UCS product line. Dell’s PowerEdge enterprise servers and blade servers would complement UCS and enable the combined company to sell a complete enterprise computing solution that could rival HP’s ProLiant and Integrity products.

The Result?

If Cisco wants to triumph over HP, the value proposition of a combined Cisco/Dell is compelling. Cisco/Dell would continue to dominate over HP in enterprise data and voice networking, would be a very formidable competitor against HP in enterprise servers and be well positioned against HP in the consumer markets.

The question is, what would HP do in response? Would it move to trump Cisco in the enterprise storage market by buying EMC and its crown jewel, VMware? Perhaps it would move up the enterprise IT stack and acquire Citrix for that company’s enterprise application suite? One way or another, if Cisco were to acquire Dell, HP would see it as a declaration of all-out war.

  1. Dell has a services business..what use does that cisco have for that?

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    1. Cisco has a services business as well.

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  2. HP buy EMC, HP buy Citrix… that would give them both Vmware and Xen… ?????

    Anywayz HP buy these…Cisco buys Dell… IBM buys some more… more buy more… Happy shopping…

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    1. Good point on VMWare and Xen. Maybe one of those could be some of the synergies in the merger.

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  3. I’ve worked for Michael Dell. He is a man driven by ego. Unless he became the CEO/Chairman of the combined entity he would not accept the deal. And, while he owns “only” about 12% of the company, his sway with the board and large investors give him disproportionate control.

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  4. Nishant Arora Friday, July 24, 2009

    But doesn’t Cisco want to play only in higher end of markets in a Leadership position while Dell is primarily into Commoditized products. They can achieve whatever they want to by a deep partnership any day. It makes more sense for Cisco to acquire companies very crucial to its datacenter visions. Do you think Cisco will not battle it out for EMC or even a BMC..? (only if they want to sell :))

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    1. Yes, Cisco does want to play in the high end of the market. But, they have done very well there and need more revenue growth – that is why they are looking to new large market segments like consumer. While I do think that EMC/VMWare is a great target for Cisco, that does not expand their products into the consumer markets. I’ve also heard the potential sticking point on that deal is the east-coast/west-coast culture clash.

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      1. true but do you think blowing cash on a company like Dell will make sense for Cisco instead of a partnership. Someday EMC or BMC might sell, do you think Cisco can risk losing them to HP, IBM, Oracle etc.(If they acquire Dell, they will lose their trump of Cash and integration capabilities)
        and consumers, they can stil acquire many companies to get into consumer and honestly think their ultimate aim is making money than competing with HP

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  5. It’s nice to see Om Malik still live in the go-go era plotting empire building… in the end, he is “media” as well…

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  6. Being in a Cisco’s shoes I would not go for buing Dell and I don’t base this thought on “Maths” I base it on the the future vision. Think about the Dell’s product portfolio and think about it’s value for future. Cisco has much more attractive portfolio. Gaining market share or revenue is not the startegists priority in IT gaining attaractive product or penetrating attaractive segment is the goal.

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    1. Ditto! I do think that if the economy does not improve you will start to see a dent in that 64% margin number. Companies concerned about budgets don’t like seeing those kind of numbers from a vendor.

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  7. Cisco’s stock would go down 20-25% the day they announced a deal to buy DELL.

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  8. Why should Cisco throw away money at Dell? What competitive advantage does Dell have that Cisco needs? When was the last time Dell was relevant? 2000?

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    1. Um, Dell is the number one x86 vendor in the US, number one vendor for Windows / Linux storage, number one iSCSI vendor, number one in all of the four TBR ratings for Desktops, Laptops, x86 Servers, and Service, and a whole host of other things…

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  9. Why? Cisco is entering the market at a major market shift with a disruptive technology … one of the big things that hurts companies during times of disruptive change is their investment in legacy technology. Cisco is going to be able to be effective in new cloud models without all of the dead weight which I think is a big advantage that Cisco has over everyone else. If Cisco were really desperate to get mind share maybe it would make sense, but did you see the recent article about the UBS CIO survey? 77% of responding CIOs were seriously looking into UCS … that is nothing short of astounding … the product hasn’t even been released yet. But it is a testament to how much the UCS hits on customer pain points.

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    1. The market for UCS is the traditional Cisco enterprise IT market – and as you point out some of that market will move toward the cloud (where they coudl arguably sell servers too). I think they need to move into new markets to grow their top line revenues. If they are going to win on UCS alone, then why did they buy the consumer Flip product?

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  10. It would have the added benefit of finally destroying once-great Dell, by integrating it in to overpriced marketing hype driven network snake oil salesman Cisco – A fitting end for a company that prided itself on efficiency, build to order, radically low overheads and great customer satisfaction.
    Now they’re just another bloated, expensive PC maker with crazy retail markups and a Malaysian call center direct from the mind of Franz Kafka.
    So let Cisco buy them, or just put them out of their misery.

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