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Posted by Glenn O'Donnell on July 6, 2012
One of the many hilarious scenes in Monty Python and the Holy Grail is the "Bridge of Death" sequence. This week's news that Dell plans to acquire Quest Software makes one think of a slight twist to this scene:
Bridgekeeper: "What ... is your name?"
Traveler: "John Swainson of Dell."
Bridgekeeper: "What ... is your quest?"
Traveler: "Hey! That's not a bad idea!"
We suspect Dell's process was more methodical than that!
This acquisition was not a surprise, of course. All along, it has been obvious that Dell needed stronger assets in software as it continues on its quest to avoid the Gorge of Eternal Peril that is spanned by the Bridge of Death. When the company announced that John Swainson was joining to lead the newly formed software group, astute industry watchers knew the next steps would include an ambitious acquisition. We predicted such an acquisition would be one of Swainson's first moves, and after only four months on the job, indeed it was.
The choice of Quest is an interesting one. On one hand, Quest has a rich portfolio of products. On the other hand, they are not as tightly integrated as one would expect, nor is the portfolio as rich as some other contenders. Quest business units are fairly autonomous since the distinct products are sold as point solutions rather than an integrated portfolio. That approach sold well up to this point, but as a larger player, Dell will need to consolidate this portfolio and add to it. Such an initiative will not be easy. Quest’s business is stronger than many expect, earning $881.5M over its last four reported quarters. One could argue that BMC Software, CA, or Symantec would have been a better choice, but consider the following:
Either BMC or CA would have been a good acquisition, but Quest makes more sense. Another option would be to buy many smaller best-of-breed companies and assemble that into a broader portfolio. Such a strategy is very risky as the integration challenges are even worse -- much worse.
Breaking the Quest family into its listed businesses, you can assess the impact of each:
There is a “Part II” to this business unit and that part is virtualization. Some of Quest's more notable acquisitions, including VKernel and Vizioncore, fit here. A different business unit might make sense for these components, but that is Dell’s concern now. This business is a double-edged sword for Dell. On one hand, it gives it some badly-needed technology to compete in the broader converged infrastructure world. In this fully-packaged workload-centric market, its software assets will be critical to the seamless packaging. On the downside, this puts Dell in direct competition with its partners VMware and Microsoft. Both partners are undeniably building powerful automation stories of their own, arguably positioning to totally dominate their own platforms. Competition with VMware and Microsoft is inevitable, however. All vendors are being pulled into the same comprehensive set of capabilities. More -- even bigger -- M&A activity is likely in the near future as these dynamics play out.
In addition to Quest being profitable, Dell gains strategic momentum with Microsoft. Dell has the opportunity to build differentiated appliances for Microsoft's core platforms with their own software to deliver customers more complete solutions. In addition, Quest delivers software and services that help migrate customers to Microsoft platforms, including Office 365. Dell now owns these tools and migration experts, and gives them a leg up in playing a role in lucrative service engagements to bring customers to Office 365. It remains to be seen how this impacts the many Microsoft partners who use Quest's tools for migrations, including Microsoft themselves.
What seems to be missing in many of these business units is Quest’s virtualization automation portfolio. It is actually buried within the performance monitoring unit -- arguably the wrong place. Dell will need to reconcile some of this with its technology acquired with Scalent. A combination of these assets will require some surgical integration and packaging. Much of this complexity should be hidden from customers, but expect some volatility as Quest gets assimilated.
Overall, Forrester believes this acquisition is a positive move for Dell, albeit one that still carries risk:
Risks: The real competition for Dell is Fujitsu, HP, IBM, and Oracle, not BMC, CA, and the rest of the management businesses. The battle for full technology solutions will be bloody, and Dell’s competition is formidable, already enjoying a lead in converged infrastructure. While Quest will help Dell compete more on the bigger IT provider battlefield, it is not enough yet. To many, this appears to be a strategy to broaden the portfolio in a way that enhances revenue without significant growth potential.
This acquisition is a bold move that will boost morale among its employees and customers; however, the euphoria will be short-lived if Dell takes too long to assimilate Quest. This is a process that will be inherently slow and painful for many insiders -- they always are. Dell must act quickly and use the Quest assets -- both products and people -- as a catapult for additional acquisitions and, yes, organic development. Dell is in a brutally cutthroat market. If it does not capitalize on Quest to quickly build momentum against its major rivals, Dell will suffer the fate of the Black Knight -- clearly vanquished but still fighting the lost battle.
Rewards: The products being acquired are popular, and Dell can grow them even more. It does have a lot of work to do to incorporate these products into its broader software-enabled strategy. It also needs much more to combat initiatives that combine business applications and converged infrastructure. That said, this acquisition is a big deal that bodes well for the future of Dell. Combined with the assets already within the portfolio, Dell will now surpass $1B in software revenue. On the announcement call, Swainson claimed it will be a $1.2B software firm after the acquisition. This is a big step away from a commodity business, toward higher margins and more importantly, more value for its customers.
Dell’s go-to-market ability is far stronger than Quest’s. With this added muscle, Dell can expand handily on Quest’s revenue stream and build at least a sales story that now includes some good software assets. Retrofitting hardware-centric sales and marketing machinery is not easy, however. This machinery, though impressive, must be re-educated to sell the new Dell value proposition.
This acquisition offers value to Dell's services arm also. Most services firms now see the value of Software-Based Services as a means to improve margins and deliver more real benefit to their customers. Dell can use Quest's software and its already prominent software-based services to bolster its existing services (built largely on the Perot acquisition). These services are strong in the aforementioned Microsoft domain, but also in database, application performance, virtualization, and many other areas.
We believe this Quest acquisition will help Dell traverse the Bridge of Death, although the bridge is shaky. Can it avoid plunging into the Gorge of Eternal Peril and continue its quest for the Holy Grail? The answer depends on how well Dell will build on these products to more effectively compete against the biggest technology juggernauts. This war has been lopsided in favor of the juggernauts, but there is hope for Dell. Quest is one of many injections of energy that it needs. The pressure is on Michael Dell and John Swainson. Let’s hope they don’t need the Holy Hand Grenade of Antioch!
Forrester analysts Vanessa Alvarez, Dave Bartoletti, Rachel Dines, Jean-Pierre Garbani, Dave Johnson, Eve Maler, Stephen Mann, Eveline Oehrlich, John Rakowski, James Staten, and Chris Voce all contributed to this analysis.
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