Dell decides not to acquire Quest

Quest is a well-known software company in the Windows space where it sells a large number of products, chiefly those that help with the management of Active Directory and Exchange. The company has been for sale for a while now and Bloomberg had reported on May 25 that Dell was focusing in on a purchase for a price north of $2 billion. However, a June 1 report said that Dell had broken off acquisition talks and wouldn’t be proceeding with the purchase.

I never thought that a Dell acquisition would be a good outcome for Quest. Here’s why:

1. Quest is a conglomeration of software companies assembled through multiple acquisitions (Netpro, Aelita, etc.) from 1998 onwards. I think that its structure will make Quest difficult for a large corporation like Dell to assimilate. This is especially so because Quest is widely distributed for a relatively small company.

2. Dell is not a software company. My personal experience of an acquisition by a Texas-based PC company (Compaq buying Digital in 1998) was that the hardware side of the business always takes precedence and that software is not as valued unless it contributes directly to additional hardware sales.

3. Given Dell’s hardware focus, it’s likely that a sizeable proportion of Quest’s software talent would leave, especially when Dell sought the almost inevitable post-acquisition efficiencies and retention agreements have expired. If management didn’t place laser-like focus on talent preservation, how many of the key Quest technologists would still be working at the company after two years? My bet is that it would be less than50%.

I also wonder what value Dell saw in the potential acquisition of Quest. It’s true that Quest currently enjoys an impressive product portfolio spanning areas from Identity Management to Database Management and Performance Monitoring. However, I see some choppy waters ahead for companies like Quest that have substantial investments in Windows Server and Exchange management as Office 365 takes more market share. Although it’s true that Quest will likely gain as customers use Quest products like “On-Demand Migration for Email” to migrate from on-premises servers to Office 365, these projects will tail off over time and Quest will have to develop new offerings to generate replacement revenue.

Of course, Quest management is well aware of the corrosive effect that Office 365 has for on-premises management products and will be taking steps to explore new possibilities for revenue generation. Perhaps new products will evolve in the form of more comprehensive and effective management tools for Office 365 applications than those provided by Microsoft. However, Quest – like every other third party software vendor that operates in the Windows management space today – faces the challenge of creating tools that require access to data that is hidden behind Office 365 firewalls. For example, Microsoft doesn’t expose data such as message tracking logs for Exchange Online so companies like Promodag that sell products that analyze these logs to generate reports about message traffic patterns can’t sell to companies that use Office 365.

Another area of interest for third-party developers that focus on Windows management solutions is likely to be in the area of hybrid on-premises/cloud management. Whereas Office 365 delivers a terrific solution for small to medium companies, it’s not quite as simple for larger companies with more complex requirements. Once companies have 10,000 or more seats, it’s more likely that they’ll use a hybrid configuration (your mileage may vary). Microsoft is attempting to make hybrid management easier through advances like the Hybrid Configuration Wizard in Exchange 2010 SP2 but ongoing management of these environments is still an underdeveloped art. It wouldn’t surprise me very much to see a lot of product development in this space over the next year or so.

In the meantime, Quest is still for sale. If you have a spare $2 billion or so and want to run a large software development company, this could just be the opportunity for which you’ve been waiting.

P.S. Exchange trivia of the day - when is 9,223,372,036,854,775,766 a good number to see? The answer is revealed in Tim McMichael's blog...

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Discuss this Blog Entry 4

on Jun 5, 2012
Dell's problem is it's size. 10%CAGR at $20 bill revenue, is a lot different than 10%CAGR at $100 mill levels. It needs an acquisition in the fast growth area (50-70%), hence the big-ticket $2bill+ in size for acquisition target. Quest doesn't cut it. I agree with your points on culture and staff attrition. Overall quest doesn't make sense for Dell. Quest's problem is more existential. It is at a risk of being obsolete in the new non-siloed cloud based world. It's product pipeline is ill-suited to maintaining cloud based solutions, as you correctly pointed out. Also, if I may add, people think of quest when they think of migration - which is once every 3 years. Quest needs a product pipeline which is used by System Admin's everyday, not once every 3 years. It needs to work on its pricing structure, and maybe get some SaaS angle to this at $10-$20/month per device levels. Microsoft reoriented the whole company, its product development and roadmap, processes, billing, support around a SaaS model. I am sure Quest can think of something. Dell didn't have anything to gain from this acquisition. But it was a big loss for Quest. Potential suitors left to call list: - Symantec (it's a tools company) - HP (Quest's tools will see far more use, if it's tied to an Professional Services Juggernaut like EDS+HP Services)
on Jun 5, 2012
I doubt that HP would be interested in acquiring Quest. The same issues of integration and talent retention would arise and I don't know whether HP would be able to leverage Quest's portfolio any better than Dell could. Also, HP still has to integrate Autonomy and make it a success before it goes after any other multi-billion acquisitions. Symantec is more of a possibility, simply because Symantec has also grown through a series of acquisitions and is somewhat like Quest in that respect. I agree though that migration tooling isn't a good enough reason for Quest to stay in the minds of potential customers. It needs something more to replace the revenue it will lose (over time) from on-premises Windows and Exchange deployments. TR
on Dec 1, 2012
The deal has been cancelled and they are not willing to acquire Quest as the company deals in Windows space. It sells a large number of products chiefly to those with the management of active directory. However, it takes care of all the troubleshooting issues. http://supportfordell.iyogi.com/dell-troubleshoting.html
on Jun 5, 2012
Quest will be a hard company for anyone to swallow. They've done very little organic development - pretty much everything has come through acquisition. That leads to a highly fragmented product line - especially when management strategy seems to have been to acquire a company, collect the license revenue renewal tail, and forget about providing substantive updates. IMHO, the best thing Quest could do is to kill off about half of their products and concentrate on something they're good at. Tools has been their forte forever - that's where their customer relationships live. If anyone really does wind up buying them, I fully expect to see a large chunk of the portfolio disappear almost immediately - either trashed or sold off to niche players who could use the expanded customer base.

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