Analysis: Behind Dell's Shopping Spree

This month, Dell pulled the trigger on two significant acquisitions. What's behind Dell's acquisition moves, and why does at least one of them seem like a no-brainer?

The acquisition of the former Wyse Technology Inc. by Dell Inc. isn't surprising. What's surprising is that Wyse hadn't been acquired before now. In fact, if you want to talk about surprising, Take a look at Dell's acquisition of Clerity Solutions Inc. That's surprising.

Dell this month pulled the trigger on two significant acquisitions: those of Wyse and Clerity. Both are linked by a relation of sorts: Wyse made its name as a purveyor of terminal hardware, which -- in the form of green-screen dumb terminals -- are inextricably linked to mainframe and minicomputer systems. Clerity markets modernization and migration software for customers that (primarily) wish to move away from mainframe platforms.

It was the not-so-surprising acquisition of Wyse that had people talking.

These days, Wyse is best known as a provider of thin-client devices for virtual desktop infrastructure (VDI) implementations. According to International Data Corp. (IDC), Wyse was No. 1 in thin-client unit shipments in Q4 2011. IDC also lists Dell as one of the volume leaders in the x86/64 server space.

On paper, it seems like a no-brainer pairing. Dell even used a quote from IDC research to promote the acquisition. "The total market for desktop virtualization solutions should continue to see strong growth globally, with the larger revenue and margin opportunities coming from the datacenter infrastructure, cloud, and services offerings that are tied to thin-client and desktop virtualization technology sales," said IDC group vice president Matt Eastwood.

"Thin-client and desktop virtualization solutions typically drive high attach rates to data center solutions, including servers, networking, storage, and services. The end-to-end datacenter infrastructure stack for these solutions is expected to exceed $15 billion by 2015," Eastwood explained.

Why Wyse Now?

Dell's move begs the question: why didn't someone else -- e.g., Cisco Systems Inc. (which recently trumpeted the momentum of its Unified Computing System push), EMC Corp., Hewlett-Packard Co., IBM Corp., Oracle Corp., or even Google Inc. -- acquire Wyse?

In fact, Heck, why didn't the former Compaq Computer Corp., Hewlett-Packard Co. (HP), IBM Corp., Oracle Corp., the former Sun Microsystems Inc., or even Unisys Corp. acquire Wyse back in 1997, when the hype over the network computer (which had been whipped up by none other than Oracle CEO Larry Ellison) was arguably at its apex?

Ellison and a host of industry backers -- including former Sun CEO Scott McNealy -- touted the network computer as a rich, GUI-based alternative to the dumb terminal systems marketed by Wyse and other vendors. The problem was that Wyse itself had anticipated the network computer push. In the mid-1990s, for example, it partnered with a then-unknown company called Citrix Systems Inc. to develop a thin-client architecture capable of displaying GUI applications.

By 1996, Wyse and Citrix had teamed up to market a thin-client alternative to Microsoft Corp.'s notoriously fat-client Windows NT operating system. Citrix supplied the software -- namely, WinFrame, the first multiuser implementation for Windows NT -- and Wyse the GUI client devices: its highly successful Winterm line. (Unlike mainframe, minicomputer, or Unix systems, Windows NT did not initially support multiple concurrent users.)

By 2000, the network computer systems touted by Ellison and McNeally -- and dutifully developed by Oracle, Sun, IBM Corp., and others -- had failed to make an impact. The NetPCs that Microsoft's hardware partners developed as part of an effort to dilute the network computing push had likewise fizzled out, but thin-client Windows devices such as the Wyse Winterm remained.

Wyse seemed a target ripe for acquisition half a decade ago, when cloud computing hype was approaching its boiling point. VMWare Inc. and several of its partners -- including Wyse -- had started promoting the idea of the virtual desktop infrastructure, or VDI.

As one of the biggest names in thin clients, Wyse was a natural partner for VMWare. It could've made a natural -- a no-brainer -- acquisition target for VMWare's parent company (EMC), too.

It could've fit in a lot of different acquisition contexts, which is precisely the point: for most large computing vendors, particularly those vested in virtualization, buying Wyse doesn't have much of a downside. That said, there's even less of a downside for Dell, argues industry veteran Charles King, a principal with consultancy Pund-IT.

"The deal will automatically, significantly deepen [Dell's] existing thin-client business in terms of offerings, revenues, units shipped and [intellectual property]," writes King, who notes that Wyse owns approximately 180 patents. King doesn't think sales of Wyse thin clients will cannibalize much (if any) of Dell's own desktop business. "[T]hin clients are essentially a data center play which matches well with [Dell's] larger IT infrastructure solutions/services strategy," he notes.

So much for how Wyse fits in contextually with the Dell of today. Buying Wyse permits Dell to position itself as the thin-client contender of tomorrow, enabling it to target any of several emerging cloud or VDI scenarios. "[These] could take the form of service providers hosting enterprise desktops via cloud data centers. But cloud-based/managed services also offer likely solutions for numerous challenges arising from the consumerization of IT," King argues. "It isn't that we're entering the 'post-PC era' -- a phrase that reveals flabby thinking or guiding hands from the marketing departments of non-PC companies. Instead, we've already arrived in the age of heterogeneous, ubiquitous personal computing."

What Does Dell See in Clearity?

Clerity isn't just a mainframe migration specialist, company officials like to point out. In one prominent case, it helped Deutsche Rentenversicherung (DRV) transition a Big Iron-based pension management application from a z/OS to a zLinux context.

Its bread-and-butter offering is UniKix, which -- although it can be used to support mainframe-to-zLinux transitions -- is usually used as a mainframe-to-Unix/Windows/Linux rehosting application. For this reason, officials have said, the bulk of Clerity's business involves mainframe-to-non-mainframe migration efforts; there's little interest -- at least among Clerity's customer base -- in transitioning traditional mainframe applications over to zLinux.

Dell, not surprisingly, seems to want to play up Clerity's role as enabler of mainframe-to-non-mainframe transition projects. The press release announcing its acquisition of Clerity even used pejorative language --"outdated hardware infrastructure" -- to describe Big Iron. "[T]he addition of Clerity gives us a clear advantage in helping customers modernize and migrate their applications off outdated hardware infrastructure to more current architectures," said Steve Schuckenbrock, president of Dell Services, in the release.

Here, too, Dell's pitch makes sense. Shops aren't arbitrarily ditching their System z workloads. According to Clerity officials, most mainframe migration efforts involve capacities of less than 2,000 MIPS: larger customers tend, not surprisingly, to be more committed to staying put on System z. Smaller shops, on the other hand, seem to be more receptive to non-mainframe alternatives. Past mainframe market surveys have suggested that a sizable minority of Big Iron installs -- from 20 to 25 percent -- involve systems with 500 MIPS or fewer in total capacity. This is the low-hanging fruit that Clerity claims to target.

In its marketing materials, Big Blue has claimed that a tricked-out zEnterprise 114 can replace up to 300 x86/64 servers. Dell and Clerity can repurpose this pitch by claiming that a single cluster of 300 x86/64 server images -- no extremely complex feat, using today's tools – is capable of assuming the workload responsibilities of a 3,100 MIPS mainframe.

Even before being acquired by Dell, Clerity officials were (tentatively) making this case."A couple of years ago, we did what Gartner said was the largest mainframe migration in North America; at the time, it was approximately 1,700 MIPS; ... the MIPS equivalent [of that migration] is now up to about 2,500 MIPS," Clerity chief operating officer Cameron Jenkins told Enterprise Strategies in late 2010. "Following this trend, we're starting to get requests that come in for 4,000 or 5,000 MIPS. We even had a request come in for 10,000 MIPS."

IBM hasn't given up on the small mainframe market, however. True, the zEnterprise 114 (its midrange market offering) scales to a capacity of 3,100 general purpose MIPS; it starts at a much less intimidating 26 MIPs, however. IBM likewise offers several System z Solution Editions that aim to make the z114 a more affordable -- and scalable -- proposition, argues veteran mainframe watcher Alan Radding, who writes about Big Iron on his DancingDinosaur blog.

"The z114 comes with a $75,000 entry price, 25 percent less than the z10 BC entry price while delivering 18 percent more performance per core," Radding wrote in July 2011. "At this price, it can begin to compete with commodity high end servers on a TCA basis, especially if it is bundled with discount programs like IBM's System z Solution Editions and unpublicized deals from IBM Global Finance."

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