Dell-Quest deal will strengthen Dell enterprise services and force shakeout in desktop virtualization market

According to Bloomberg News Dell is in discussions to acquire Quest Software in a bid to strengthen its enterprise software services portfolio. Dell has been shopping, with five acquisitions announced so far this year, to add software, computer storage and networking gear to its lineup of PCs, which account for 52% of its sales. With PC sales flat and margins thin, Dell has been seeking to broaden its services portfolio and directly challenge HP which has suffered multiple missteps in recent months.

Quest would enable Dell to provide a one stop shop for all desktop computing needs, transforming its PC business from a large but worrisome concern to a major profit center.  With Quest supplying a full suite of client computing technologies including desktop virtualization VDI, identity and access management, user workspace management, data protection, Windows server management and performance monitoring  as well as a strong database management component; Dell would be the obvious choice to become the go to vendor for desktop services. It won’t be easy though. Dell has had challenges integrating its low cost sales model with the more complex service offering that have come with its recent diversification, and the broad product portfolio that Quest would bring to the table will is not something that Dell could swallow overnight.

Assuming that the deal goes ahead, what does this mean for the desktop virtualization market? Of the new generation of desktop virtualization software vendors, Kaviza, Ring Cube and Virtual Computer have gone to Citrix, Wanova has gone to VMware,  Neocleus went to Intel and Quest picked up both VKernal and ChangeBASE last year. Quest already has a partnership with MokaFive to provide client hypervisor technology which makes MokaFive an obvious acquisition target for Dell should the Quest deal go through. The prospect of Dell being able to offer its own client hypervisor solution is an intriguing one. Citrix certainly wouldn‘t like it and neither would Microsoft – Dell previously tried to offer Citrix XenClient as a pre-installed desktop offering only to pull back after strong opposition from Microsoft, but that doesn’t mean the ideal is permanently shelved. VMware and Citrix would also have to contend with the idea the Quest vWorkspace could see a much larger share of the market if Dell were to offer it. vWorkspace is already capable of meeting most enterprise customers’ needs for both VDI and Presentation Virtualization and in its latest release can be as simple to deploy as Citrix VDI-in-a-Box. Of the two Citrix has more to lose from Dell offering vWorkspace, especially as Dell has only recently started offering its VDS Simplified solution based on VDI-in-a-Box.

Quest had previously struck an acquisition agreement with Insight Venture Partners in March at a price of $2 billion, or $23 per share. However, on May 9, Quest announced that it had received multiple alternative proposals which it describes as being “reasonably expected to lead to a superior proposal.” Details of these offers were not disclosed but are widely understood to have included an offer from Dell. JPMorgan Chase & Co,. has said Quest is worth about $28, based on the software provider’s sales and cash flow, and could attract bids from International Business Machines Corp., Dell or other private-equity firms. Unconfirmed reports suggest that a previous deal between Dell and Quest may have collapsed after investors sent Dell’s shares down 17 percent on Wednesday when the company reported a disappointing revenue forecast which mean that a Dell bid nearer to $23 than $28 could be on the cards.

According to a lawsuit filed in April, Quest’s new CEO Vinny Smith had previously been shopping Quest around looking to sell the company in a bid to avoid investigation by the U.S. Securities and Exchange Commission following Quest’s disclosure of a “material weakness” in internal controls over its financial reporting. It has also been suggested that Smith took over from former CEO Doug Garn in February because Garn was reluctant to certify the company’s annual report. This is the second time Smith has held the CEO role at Quest and could be the second time he finds himself in the SEC’s spotlight. In 2008 he agreed to pay $300,000 and step down as CEO to settle litigation over the backdating of Quest stock options.