Why Cisco Should Buy Dell

39 Comments

[qi:012] The skirmishes that have been taking place between Hewlett-Packard (s hpq) and Cisco (s csco) 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 (s 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 (s ctxs) 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.

39 Comments

MD

First, people have been talking about this for a while now (at least a year..), this is not new thinking. I’ve heard this from other futurists / competitive intelligence folks out there for a while. Would the acquisition make sense? Sure. Mark Hurd is taking share from Cisco via its ProCurve 20% Cisco exchange program. The same thing is happening right now that happened in 2001, etc. Companies shifted back to traditional capital budgeting principles and are buying cheaper products that do the same job as Cisco’s more expensive products. Is ProCurve inferior? Yes. Do companies need all of the robust functionality from Cisco? No. Mark Hurd plans on commoditizing the networking category just like the PC’s and servers. Will WINTEL esque standards make their way into the category? I’m guessing yes (maybe I’m ignorant here). Fundamentally speaking, Cisco will no longer enjoy the stellar margins they’ve had in the past. Does HP now exactly where to hit Cisco? Absolutely. They’re a one trick pony and realize it. Is a price war on the horizon? Yep. Bank on it. Did everyone realize HP’s IPG business was its achilles heel (one trick pony) when Dell tried to attack it with Lexmark unsuccessfully a few years ago? Yep. HP realized this and quickly moved into IT services and software to create another crown jewel. Did HP succeed? Yep. Did Dell realize that HP’s secret sauce to its IPG business was the indirect channel that made up the most of this business? Now they do. Are they embracing the indirect channels to hit HP? Yep. Is HP less scared now that they have EDS? Yep. Will Dell recover as it outsources all of its manufacturing to the EMS and ODMs and lower the heck out of its cost structure to hammer HP. Count on it.

It makes sense that a major shake-out is going to occur as Cisco, IBM, HP and Oracle/SUN all try to create full HW/SW portfolios. Will Brocade, Juniper, F5 Networks, Riverbed or BlueCoat be around on their own in the next few years? Probably not. Will IBM, HP, Oracle/SUN buy the networking guys to attack Cisco? Would you? Yep. Cisco has the most wood to chop from that perspective. Can Cisco truly ramp its data center stack and gain share before HP, IBM and others snap-on the networking acquisitions to hammer Cisco? I’m guessing the momentum is against Cisco in that regard. In addition, when a CIO considers upgrading data center infrastructure, they don’t call the networking guy, they call the server guy. If I’m a CIO, I’m calling HP, IBM and Dell that own the market. Not Cisco. If Cisco bought Dell, they would immediately have street cred in the x86/64 market which they need more than anything. Also, Dell’s primary strength is in the commercial market and has the ability to dent IBM and HP. I think Sun has too many headwinds going against it. Nice try Oracle? You’re also too expensive.

A few things are going to happen in the future. First, Networking will commoditize and there’s nothing Cisco will be able to to about it. Can they gain scale in their 30 adjacencies before HP and others dilute their dominance on the networking side? That’s one heck of a tough bet when the top OEMs now want to hand your wazoo to you on a platter. Second, I think it would make more sense for Cisco to acquire a Dell over EMC. Why? Because Microsoft’s Hyper-V is going to hammer VMWare in the future and Dell is going to continue making acquisitions on the SAN/NAS front to hammer EMC. Therefore, I think Cisco will eventually become an IT services/software company similar to IBM and HP (they’re hoping). Also, if you’re Cisco, if cloud computing takes off the way everyone believes it will, thin-clients and notebooks will rule the world (HP’s vision). Cisco will not only be able to sell the storage, server, software, but will also be able to sell the information worker stuff. Also, John Chamber’s replacement will have to be an operations guy like Mark Hurd to squeeze every basis point out of every division and process. Then again, I did have way too much to drink at the BBQ tonight ;^)

Best,

-M

Paul O'Farrell

Hey Allan

Its been a long time since the Cisco Network Management VT, hope all is well.

Got to disagree with you on this one fairly strongly. Reasons are many. I see little to no alignment of the vision of Dell with Cisco’s. John has laid out a fairly long term strategy on where Cisco is going and how they plan to get there – exactly what is Dells business strategy (need a washing machine – specials today at Dell.com).

Cisco is somewhat consumer (Linksys – but the brand grows weaker), Enterprise (they own the space) and SP focussed (but they seem to be surrendering this space). Dell does well in Consumer, but is loosing in ever other of these spaces. Dell offers Cisco nothing in Enterprise. They have none of the high touch resources that these customers demand aligned to drive business and have never successfully changed there sales models to achieve this. Effectively they offer Cisco nothing in terms of market.

I do not see any cultural alignment between Dell and Cisco? Dell a culture of ego? Cisco a culture of technology/sales? Have you looked at the leadership at Dell vs Cisco – how do you see this happening?
Certainily while Cisco culture has evolved from its origianal technology/entreprenial one over the years, it is still radically different from the culture of Michael Dell that pervades and stagnates that company.

When you look at the product mix from Dell, how is it radically different from any other player in this space. Frankly why would Cisco want to play in such a commodotized low margin business and put its future in the hands of Microsoft? If they really really had to go into this space they would be better looking at companies with some growth potential in Asia – Acer or Lenovo, than Dell.

Cisco have a really tough path to tread with the “new” relationships or lack thereof they will be having with IBM and HP. Dell is not going to help them here one iota.

Paul

SBC

Actually, what Cisco needs is not Dell, but Apple:
– premium brand
– high margins
– good synergies in the distribution
– the most important: extension of already accessed market segments: consumer CPEs, video
This would be the real hit – if possible…

Allan Leinwand

I originally had the same fleeting thought, but Apple’s $142B market cap probably does not allow this to occur. About the best thing that could happen here would be a merger of equals and that would be difficult. Also, Apple does not have the enterprise IT presence that Dell does in the data center compute, storage, laptop or desktop markets (although they are certainly gaining market share in those last two).

sleepy

Dell is a zombie corporation with negligible net assets of any value to Cisco. Michael Dell will finish flying it into the ground, and no-one will care.

Habib Ullah Khan

Actually Cisco has already invested significantly in and announced its rack based line of servers.

What is happening between Cisco and HP are 1 billion dollar skirmishes in a third of a trillion addressable market for these two. Our Hollywood culture attuned minds always want to see Megatron take on Optimus Prime. It aint so. It aint so.

Cisco’s entry was in the virtualized server space a part of the market growing almost 100% a year. It does not matter how much sense a merger makes. If it is to acquire a company whose market is barely growing like enterprise servers Cisco is not interested unless it feels its survival is at stake. Which it is not.

Cisco will use this downturn as it has used all downturns to invest in companies that give it an edge when the economy comes roaring back. Virtualized DC is a seismic IT shift it had to leap into to remain significant in the future to its current mega end users. Similarly it moved into Unified Communications to remain relevant to how the people with those end users interacted. Now I suspect you will see Cisco moving into an area that allows it to understand how these end users think while making budgets.

So think Accenture if you wnat to think of a radical acquisition for Cisco. Not Dell.

rishikumar03

Yes I think it will be a good move bu Cisco .After buying HP cisco can offer more services in a single umbrela…

JB

Insane. This would never happen. I know that John Chambers wouldnt read this article, but on the off chance he does, I hope he laughs as hard as I did.

stepbackforward

Also FYI, Dell is NOT an enterprise brand. They have a really hard time cracking serious enterprise RFPs for all but the most minimal of technologies. They have very weak sales engineers spread across a huge swath of projects. If this happens I’ll apologize, but it has a huge wiff of a speculating outsider.

Allan Leinwand

Not sure Cisco will buy NetApp – that would make it even more unlikely that they would buy or merge with EMC/VMware where they are spending their partnership and investment efforts.

Gadget Sleuth

Joe: Yeah sadly that’s true…the value of Dell, even in the basic public eye, has diminished the last few years with mediocre customer service and increasing product failure rates.

Green Data Center Man

Aren’t both Dell and Cisco considered ‘friendly’ competition for HP? I believe HP needs both of them in order to show how good they are by comparison.

Joe

The brand value of Dell in the consumer market is pathetic. Cisco’s consumer acquisitions are all known for quality and value – Linksys/Flip/SA etc. I can’t envision Dell on the radar screen 5 to 10 years from now. Don’t see a point in this article.

stepbackforward

Yes, agree. Dell is a technology distributor, and has only a distribution brand. Horrible fit with Cisco which is an IP driven company. Don’t forget Cisco would be buying into a huge PC franchise.

Jake

With Dell, you would be overpaying for the brand on a commodity product.
Real assets though – the front end consumer sales process (ecommerce, phone/call center) is one of the tops in the world. But the overall product probably evokes cheap and acceptable and not necessarily good. Better to get something more generic and label it Linksys or Cisco.

Here’s a thought: take that $1.20 EPS and pay a 5% dividend to the shareholders. How about a one time $2/share dividend to the shareholders?

When Microsoft couldn’t figure out what to do with their cash, that’s what they did. Special dividend to actually return that cash to those who own the company (and therefore the cash).

majortom1981

In my opinion cisco needs to do something. Why in the world would i buy a cisco product when the equivalent hp product is atleast half the problem.

Dont give me that cisco has better support. I was told by a cisco customer service rep that she would not help me with a cisco ios upgrade (long story) and hp has had no problems helping me with their firmware upgrades.

Last time i got a quote for two competing products the HP product was $5000 cheaper for the same specs as the cisco product.

Tom_main

Oh yeah sure this would work. Giant mergers always work out for the better…

Not

slim

totally agree w/ Tom_main. Allen get a freakin clue. John Chambers is a lot smarter than you.

Nilesh

It really doesn’t make logical for Cisco to buy Dell because there is no synergy with the vision Cisco has with UCS. Integration with a mamoth like Dell will not be an easy task for Cisco. Cisco’s focus is on DataCenter. They may be interested in VMware/EMC for virtualization and storage which are missing in their arsenal.

let’s watch how it goes…

LG

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.

Art

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.

Allan Leinwand

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?

M

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?

JDFW

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…

bmillertlr

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

Petar

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.

Courtney Benson

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.

SV

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…

Nishant Arora

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 :))

Allan Leinwand

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.

Nishant Arora

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

Harry

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.

techie

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…

techie

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

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