Texas-based Dell Computer just announced that it's buying Orange County's Quest Software, for a very respectable $2.4 billion, roughly a $422-million premium on what the company was considered to be worth a few months back, when Dell offered $23 a share and kicked off a bidding war that pushed Quest's value to $28 a share.
The consensus view is that Dell is buying future growth. The so-called "enterprise" market is getting hot, as the consumer Web space has become a lot more crowded, both for desktop software and new mobile applications. Businesses have more complex needs, however, and often seek out custom solutions — and they do it often enough to make this a roughly $250-billion market, according to Gartner, an IT advisory company.
Oracle, IBM, and SAP are well-known in this field. But Microsoft is actually the biggest player. Dell, on the other hand, made its name for building PCs to order. And with the advent of smartphones and tablets, that market is fading. It may take a while to completely vanish, but established PC makers are eyeing other lines of business and spending aggressively to acquire them. Dell alone has been buying at a decent clip, spending down $15 billion in cash last year to around $13 billion in the first quarter of this year.
Whether the growth Dell is buying at Quest will materialize is an open question. Quest has been growing, but if Dell wants to make good on the investment, it needs to speed that growth up. For the most part, that's the big question analysts who have been following the deal are asking. For the most part, they think the price was about right, given Quest's earnings outlook.
But there's something else afoot here. If you look at what Dell and Microsoft are up to, you can see some interesting maneuvers among two of the most old-line of old-line tech firms. Dell was founded in 1984. Microsoft got started a little less than a decade earlier, in 1975. Both companies have been presided over by icons of American business, Michael Dell and Bill Gates. And both companies rode the wave of the PC revolution — and especially the conquest of business by the PC — until what appears to be its natural conclusion, as that era winds down.
Dell wants to do more than hardware, copying the strategy that IBM employed when it moved into IT consulting and shed its hardware business (Dell isn't going to go that far, however). Microsoft wants to give hardware a shot — it just introduced its first real tablet, dubbed "Surface," which will go on sale later this year.
But at the same time, Microsoft is seeking to maintain a veritable monopoly on core business software, recently buying the social networking site Yammer (a sort of Twitter for business) for $1.2 billion. It will integrate Yammer with Office, adding a new piece of functionality to the familar triad of Word, Excel, and PowerPoint.
All this activity in enterprise has made the segment cooler than it's arguably ever been. Earlier this year, Box.net CEO Aaron Levie made the case for enterprise chic, at TechCruch: "Almost everything about this category—from how software is built to who’s buying it—is undergoing massive change, and many longstanding assumptions no longer apply."
Levie is an understandable enterprise cheerleader — he was early to the IT-is-cool position, as this post proves. Plus, he runs a startup that offers enterprise products AND his Box.net has brought in $150 million in funding from the Silicon Valley VC elite, including Andreessen Horowitz and Draper Fisher Jurvetson, according to SoCalTech's database. Not too bad for a guy who jumped on the enterprise bandwagon while still an MBA student at USC.
He has some prestigious company, however. Union Square Ventures' Fred Wilson has been insisting that moving what's worked in the consumer Web and mobile to the enterprise is a good business model. So ironically it could be the old guard in tech that leads young companies into this new fray.
Of course, not everyone sees it that way — Levie, for one. For him, the big guys are following the little guys as they redefine the space. I reached out to him and he shot back an email:
Businesses all over the world are moving to cloud solutions that are more mobile, social and user focused. We're going to see a lot of disruption in the enterprise technology landscape over the next few years as traditional players fall behind startups in innovating for the future.
He's got a point, and Microsoft buying Yammer makes his case (although the massive Amazon-related cloud computing outage that Netflix, Instagram, and Pintrest went through over the weekend raises a few concerns on this front). But then again, Quest was founded in 1987. So Dell is attacking the enterprise at a different angle.