- The EMC Dell deal - the biggest tech deal ever, was agreed on and publicized this week.
- In the background, Dell cybersecurity arm is preparing to go public.
- EMC data analytics arm will become smaller and more marginal after the merger.
- A small merger between these two subsidiaries could unlock additional shareholder value.
In the background of the massive Dell and EMC merger, which first made the news earlier this month, there is a rising threat for cybersecurity companies in the form of a smaller merger of EMC’s Pivotal and Dell’s SecureWorks. Pivotal is a joint venture of EMC (NYSE:EMC) and Vmware (NYSE:VMW) offering different cloud services that include an open cloud platform and big data analytics that create a secure online environment with immediate access for data analytics. SecureWorks is a fully owned Dell subsidiary providing pure cyber security services from firewall management and combating advanced persistent threats to log monitoring and PCI scanning.
A Secureworks IPO Under Way?
Dell's cybersecurity arm, SecureWorks, reportedly filed a confidential S-1 under the JOBS Act regulation reserved for emerging-growth companies with revenues below $1B in the recently completed fiscal year. Using the SecureWorks IPO, Dell plans to attract new investors to the company and slowly dilute its holdings in the company. As a standalone company, the SecureWorks valuation might rise to $2B, and that could be highly attractive to companies interested in penetrating the cybersecurity market through an M&A.
Pivotal, like many other data analytics companies, offers a wide variety of tools that can be used to spot trends, irregularities, network usages, etc. While Pivotal's tools could be used for business intelligence, web analytics and IT operations, it could also be useful in cyber-security. Combining SecureWorks’s solutions of threat prevention and firewall management with Pivotal's solutions in the data analytics area could create a powerful security solution that could address many issues IT departments deal with every day.
EMC Dell Deal Paves The Way For Another Merger
As EMC and Dell are joining forces to create a computing behemoth mainly on the server side, software operations like Pivotal might not be relevant for the merged company. As Pivotal generates only 1% of EMC’s revenues, in the new company, it will generate a smaller portion of the revenues.
The SecureWorks IPO offers an opportunity for EMC and Dell to merge Pivotal with SecureWorks and create a bigger, stronger cybersecurity firm that is positioned to grow independently of the parent companies. Merging these two side businesses could unlock the great potential these businesses withhold and increase Dell’s and EMC’s shareholder value in the short term. In the long term, the new cybersecurity firm could be an attractive target for acquisition.
According to the SEC regulation, companies that submitted their S-1 under the confidential process must lift the confidentiality at least 21 days before the roadshow begins. That means that SecureWorks could hold its IPO as early as the end of the year; however, as the EMC Dell merger is expected to be closed later in 2016, I believe that the IPO will occur at the beginning of next year. I would expect EMC Dell to merge Pivotal into SecureWorks and operate it as a standalone division within the company until after the IPO, when the company could perform any efficiency process required after such a merger.
As this scenario might seem distant or in low probability, I believe that this has to be one of the outcomes of the EMC Dell deal. This way, EMC and Dell could unlock additional value from their deal and put the new company up for sale.