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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