EMC Changes Acquisition Strategy To Focus On Startups Over Maturity

Joe Tucci

EMC has changed its acquisition strategy from one that focuses on mature technologies to one that brings it technologies that have yet to go into production, a move that lets the company take a longer-term view of how new technologies fit customer requirements, EMC's top executive recently told investors.

EMC Chairman and CEO Joe Tucci late last week told investors at the Wells Fargo Securities Tech, Media & Telecom Conference that acquiring startups also results in a significantly lower cost to the company.

Tucci, responding to a question from Wells Fargo Securities analyst Maynard Um, also said in a conversation that can be heard here that EMC has purposely decided to not absorb certain acquisitions like VMware into a greater EMC as a way to ensure it attracts and keeps the best talent possible.

[Related: Tucci Admits Internal Friction In EMC Federation, But Tells Investors It's OK]

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Tucci in the past has repeatedly told CRN, and other news outlets and investors, that when looking at potential acquisitions, it prefers to acquire companies that already have the No. 1 or No. 2 market position in their markets.

However, Tucci last week told investors that this is no longer the case.

Tucci cited as an example EMC's late-2012 acquisition of XtremIO, a tiny Israeli developer of all-flash storage arrays, which it purchased for about $400 million.

EMC acquired XtremIO because the company felt its scale-out architecture was, by far, the best available, Tucci said.

"And then, of course, we invested ... not a tremendous amount more money, but not peanuts, either, in terms of making it ready," he said. "If I had waited 'til today, maybe they wouldn’t have ramped as fast as EMC, but that would be maybe a $300 million company. And I went to buy it today? They would be wanting minimum starting price 10 times revenue. So, obviously, we felt it was better to take some pain up front. And you can make an argument, that, yeah, 'But you have placed six of those bets in a similar time frame,' and that’s true. And we do this on behalf of our shareholders. And I think they were good bets."

EMC channel partners said they like EMC's strategy of acquiring companies whose products are not yet ready for market.

NEXT: Partners Look For Visibility, Not Surprises, In Acquisitions

Traditionally, a company should buy another company with a somewhat mature product that can be integrated into the purchaser's business, said Jamie Shepard, regional and health systems senior vice president at Lumenate, a Dallas-based solution provider and longtime EMC channel partner.

"But in this new world, there's not a lot of mature products," Shepard told CRN. "EMC is not necessarily looking for market disruptions. It wants evolutions. It is still dealing a low with customers already dealing with migrating to more modern platforms."

Companies like Actifio and Nutanix disrupt the market in a good way, and were built from the ground up to be disruptive, Shepard said.

"Companies like EMC have existing businesses to serve," he said. "When EMC brings in newcomers, it has to change its business to meet the newcomers in the middle. For instance, when EMC acquired Data Domain, that company was deep with Symantec. It took a year to build its NetWorker into Data Domain."

Dave Wasserman, managing partner at Sovereign Systems, a Norcross, Ga.-based solution provider and longtime EMC channel partner, also used Data Domain to illustrate EMC's acquisition strategy.

"Data Domain kicked EMC's butt for a while," Wasserman told CRN. "It was very disruptive technology at the time."

In later years, EMC's strategy changed as customers started seeing the value of technologies like software-defined data centers and their road maps, Wasserman said.

"There's more value to be had from an acquisition than buying a company and sticking it in the product line," he said. "Acquisitions today are big software plays. If you want full integration with EMC's software-defined data center strategy, you need integration with things like EMC's ViPR software-defined storage platform."

For channel partners, it is more important to get visibility into what will happen in the next 12 to 24 months than it is to make plans and then see product from a new acquisition dropped in their laps, Wasserman said.

"Visibility and transparency of what's coming down the pipe makes it easier to do business with larger companies," he said.

Tucci said investors should not expect all the head winds related to EMC's acquisitions to become tail winds in 2015. However, he said, some absolutely will, an idea he promised he would be more forthright about next year.

"We will be a little bit more forthcoming, not that we are hiding it, when these investments are going to pay off and then, of course, those head winds become tail winds. ... If we waited, the price of these acquisitions was going to nosebleed levels," he said.

NEXT: Taking The Time To Do Acquisitions Right

Turning an acquired startup's technology into a marketable product takes time, Tucci said.

"We bought a company once, and the name shall be nameless, and I called four of my favorite CIOs," he said. "It was a private company. And I said, 'We are thinking of doing this. You're a user of this product. What do you think?' And they all gave me two-thumbs-up. It was a great thing to buy. We had the product less than a month, and three of the four called me and complained about quality problems. I said, 'Why didn’t you tell me that?' They expected that we are EMC; they expect the higher level from it."

As a result, EMC takes its time shipping products from its startup acquisitions to ensure those products meet EMC's quality requirements, Tucci said.

"So we probably ship them a little later than a pure startup will, because startup, by definition, gets more slack," he said. "So it depends where they are. I mean, basically, when they are ready, we ramp them quick. AirWatch is ramping very quickly, for instance. ... Nicira is ramping very quickly. XtremIO is ramping quicker than any of them. And I made a bet that this would be our fastest product from zero to a million, and I am going to win that bet easily."

Tucci said he is confident that DSSD, which EMC acquired in May, will ramp even faster.

I mean that’s just kind of how I feel, but DSSD, there is no product," he said. "There is no ramp we can do, so all we have is costs. But if I waited until it became a product and had commercial success, what would the price be? So that’s kind of the ploy pattern."

Many of EMC's acquisitions, including VMware, Pivotal and RSA, are run as separate companies with their own president-level executive teams, a model Tucci said he has no plans to change.

Responding to Um, who asked why EMC does not take advantage of some of the synergies from its acquisitions to integrate them fully into EMC, Tucci said EMC's system helps retain talent.

NEXT: Why EMC Doesn't Outright Absorb All Its Acquisitions

"If you went through all six of those companies -- Nicira, AirWatch,DSSD -- all the founders are still there," Tucci said. "A high 90 percent of the employees are still there. They have gone around to the other great companies and they have attracted tremendous talent, and that’s because we let them set up a little bit of identity. We reward them on their mission, and they feel like they can make a change. And VMware feels that way too."

Culturally, EMC's acquisition method allows the people in the startups it acquires feel like EMC is a good place to work, Tucci said.

"I just talked with the leaders from DSSD, literally, last week and they never told me this, I guess we were getting the check light telling me then, they basically said we had a lot of angst about coming into this big, huge company," he said. "And then they started telling me how great they thought it was, and how we are giving them more tools, more money to execute their mission, giving them more access to customers, and they just loved it. And they talked about the talent that they were recruiting from some of their peers. So that’s the model we set up."