Dell Moves 1 Step Closer to End-to-End

Dell’s announcement of its planned Quest Software acquisition seemed more inevitable than surprising. Quest had been in play since March, when it said investment firm Insight Venture Partners offered US$23 per share (or about $2 billion) for the company.

The price jumped when an unidentified player — many assumed it was Dell — entered the bidding against Insight and its ally Vector Capital, until Dell announced its successful bid of $2.4 billion or $28.00 per share. That’s a nearly 50 percent premium on Quest’s $19.40 ending price when the wheeling and dealing started on March 8, so what exactly is it that makes the company such a desirable target?

Two things: 1) Quest’s systems management portfolio; and 2) its financial position. Both are critical to understanding Dell’s steady interest and pursuit.

On the systems management side, Quest’s solutions dovetail nicely and offer very little overlap with Dell’s other system software offerings. That portfolio has been steadily expanding since founder Michael Dell returned to the company in 2007 and enjoyed a further growth spurt in February when the company announced the formation of a new software group presided over by John Swainson, the former CEO of CA.

However, software acts as an engine across numerous Dell development efforts and go-to-market strategies, including IT management and services, cloud and end-user computing.

Quest’s Contribution

What does Quest promise to bring to the party? A highly diversified portfolio of solutions for everything from database management and protection to data backup, replication and recovery, to system and application performance management, to simplified compliance and security, to workspace management, to application delivery for any device, to specialized management for Microsoft’s Windows Server, Active Directory, Exchange and Sharepoint.

Among the company’s most notable solutions:

• Windows Server management solutions that complement Dell’s efforts in application modernization, including its acquisitions of Clerity Solutions and Make Technologies;
• Quest Database Management solutions, including its Toad DBA productivity tools whose capabilities intersect a host of Dell’s enterprise offerings;
• Performance-monitoring solutions, including Quest Foglight, a popular platform for applications performance monitoring, and;
• Quest One Identity and Access Management platform, which should add significant value to Dell’s existing SonicWALL and SecureWorks solutions.

All of these should be intriguing, potentially valuable additions to Dell’s stable of business IT solutions, but Quest’s financial position was also important to the deal.

This is partly due to the premium required — partly to quell any concerns by nervous shareholders — but it also favorably underscores Dell’s strategy in contrast with some competitors’ acquisitions, like the lofty $12 billion price HP paid for Autonomy last August.

Quest’s position appears highly attractive by most any measure: According to Dell’s announcement, the company serves more than 100,000 customers worldwide, including 87 percent of the Fortune 500, resulting in $857 million in global revenues (based on FY2011 results) at gross margins of 86 percent and operating margins of 11 percent.

Quest has approximately 3,850 employees in 23 countries, including 1,500 software sales experts and 1,300 software developers. The result, according to Dell, is that Quest will provide a solid foundation for a $1.2 billion annual software business.

Final Analysis

Overall, the acquisition looks like excellent news for both Dell and Quest, and their respective business partners and clients. Quest offers enough immediate value in the form of its solutions portfolio, its software development and sales expertise, and its substantial customer base to more than justify the premium Dell will pay.

Plus, Quest’s solutions are well aligned with Dell’s existing product and service portfolios, meaning it should complement and extend the company’s new software group’s offerings.

In addition, Quest appears to align with previous Dell acquisitions. The company has a solid record of finding valuable companies with talented founders and managers and keeping them in place after the deals are done. That’s a critical issue, particularly in areas new to Dell, since those executives’ experience in product and market development can help to avoid common problems and ensure future success.

It’s too early to tell for sure, but we would be highly surprised if a sizable number of Quest executives jumped ship after the deal is completed. The most important point of all is how Quest will help extend Dell’s broader IT solutionsstrategy — an effort that has been steadily growing ever since the return of Michael Dell with software often taking center stage.

That shouldn’t be a surprise since emphasizing software has been increasingly critical to the success of virtually every enterprise IT vendor. From where we stand, Quest Software is likely to provide a sizable means for Dell to achieve its end-to-end IT solutions provider goals.