Why Dell Shelled Out $2.4 Billion for a 'Niche' Software Company
Quest Software started out in 1987 with a simple mission: to make software that eased the administration of fear-inducing Oracle databases. In those days, Quest had several dozen employees, was making a few million dollars a year, and was glad of it.
A lot has happened in 25 years, leading up to a $2.4 billion buyout of the company by Dell announced July 2. Led by co-founder, chairman and CEO Vinny Smith, the company has since morphed tremendously into a veritable Home Depot of data center tools, with dozens of data management, security, application monitoring and database offerings.
The Aliso Viejo, Calif.-based company now has 3,850 employees (including 1,300 software developers) in 23 countries, banks about $860 million in annual revenue, has a large and loyal installed base, and--get this--an 86 percent gross profit margin.
Regarding that last metric: Could it be that Quest has been charging way over the top for its software licenses, has all its customers inextricably locked in, or both? Or could it be that Quest's products just work really, really, well, inducing IT decision makers to buy them at any cost?
One thing we do know about customer loyalty in this case, and it certainly caught Dell's attention, is this: 55 percent of Quest's customers are repeaters. That says a lot.
Nonetheless, Dell has spent more money on only one other acquisition since 1999, and that was Perot Systems (remember Ross Perot?) in 2009 for $3.9 billion. So why did Dell shell out all that cash for a midsize software company that, for all appearances, is merely a niche player?
The key word here is "appearances." While Quest may appear to be ultra-specialized, the "niche" we are talking about is a much larger one than many people believe; it's more like a canyon. This niche is growing all the time with the increasing global IT emphasis on cloud systems and data analytics.
Plenty of Room for Data Center Market Growth
This data management software market for new and newly refreshed IT systems is growing at a healthy 20 percent per year, and only 15 to 20 percent of data centers have been updated in the last five years. Talk about room for growth.
So what exactly does Quest Software bring to Dell's party? We can start with a diversified portfolio of everything from database management and protection to data backup; replication and recovery; system and application performance management; simplified compliance and security; and workspace management.
This is not to mention such currently hot areas as application delivery for any device and specialized management for Microsofts Windows Server, Active Directory, Exchange and Sharepoint.
Major bonus: All of Quest's software works on premises, in a virtual machine, or in a cloud system.
"By nearly any measure, Quests position appears highly attractive," Principal Analyst Charles King of Pund-IT said July 2 in a flash report. "The company serves over 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. According to Dell, Quest will provide a solid foundation for a $1.2 billion annual software business."
Early Take: A Good Move for Dell
In summary, the acquisition looks like excellent news for Dell and its business customers, King said.
"Quest delivers enough immediate value in the form of its sizable solutions portfolio, its software development and sales expertise, and its substantial customer base to more than justify the premium Dell will pay," King said. "More importantly, Quests solutions are well-aligned with Dells existing product and service portfolios, meaning it highly complements the companys new software group."
Dell has had plenty of time to check out Quest. The two companies have been partners for more than a decade.
"What may be the most important point of all is how Quest will help extend Dells broader IT solutions strategy, an effort that has been steadily growing ever since the return of Michael Dell [as CEO in 2007] with software often taking center stage," King said. "That shouldnt be a surprise; emphasizing software has been increasingly critical to the sustainable success of virtually every enterprise IT vendor. From where we stand, Quest should provide a sizable means for Dell to achieve its end-to-end IT solutions provider goals."
Complexities Need to Be Addressed
In a contrarian viewpoint, CTO Harry Labana of Quest competitor AppSense told eWEEK "that despite what the pundits say, it's still going to be problematic for Dell to bridge the new world with the old world [in integrating Quest's products]. There's a lot of complexity in all of this. Dell is very much an assembly-line type company, and the use cases here are likely to be very custom-oriented."
Labana also said industry people will wonder how this acquisition will impact Dell's relationships with Citrix and VMware when it comes to desktop management services. Clearly, some of those products and services overlap, although Dell has always been about multiple choices for its customers.
The bottom line is this: Quest fills so many holes in the Dell software catalog that it automatically becomes the new foundation for Dell's enterprise software business, simple as that.
Chris Preimesberger is Editor of Features and Analysis for eWEEK. Twitter: @editingwhiz