4 Reasons Dell-EMC Deal Makes Sense; One Reason It Doesn't

by CXOtoday News Desk    Oct 09, 2015

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The technology industry is flooded with news, updates and speculations over EMC and Dell, two major technology companies, who are reportedly in talks for a deal under which Dell will acquire EMC, which has a market capitalization of $52 billion - making it one of the largest tech mergers of all time. The potential acquisition of EMC, .

EMC, a company which existed for over 3 decades, makes data, and storage products for the enterprise, has a market value of about $50 billion. Texas-based Dell, which rose to prominence in the 1990s ruled the PC market for the last two decades, went private in 2013 for $24.4 billion.

Read More: Dell-EMC Deal May Be Biggest-Ever In Tech Sector

Why the deal make sense?

Analysts see a number of reason why the deal makes sense and a few reasons why it doesn’t. 

1. PC maker Dell has transformed itself into an IT services company. Dell posts about $56 billion in annual revenue according to Goldman Sachs, most of which comes from PC sales and a little of which comes from enterprise storage. EMC is the world leader in storage gear, and for the most part its products don’t overlap with Dell.

“The two businesses are largely complementary. Combining them could yield a company with about $80 billion in annual revenue and free cash flow of about $7.7 billion,” ,” writes Goldman Sachs analyst Simona Jankowski.

2. Dell, led by CEO Michael Dell, would be able to expand its business and gain entry into a key part of the data storage market. It could help Dell move away from the stagnant PC market and and tap strongly into the faster-growing and more lucrative market for managing and storing data for enterprises. The deal would undoutedly cement Dell’s transition from a consumer-facing company to one focused on technology for the enterprise. 

3. The deal would also get control of the software company VMware, which will help Dell to beef up its cloud-based offerings for corporate customers. As a ZDNet article notes, combining with EMC could be very good for Dell, which lacks the enteprise cred of IBM, HP, Cisco, Oracle and EMC. EMC’s sales, marketing and engineering expertise would give Dell a strong foundation for future growth. CNBC’s David Faber reported, Dell would maintain control of VMware.

Before news of the talks, VMware was trading at a market valuation of about $35 billion. That works out to about $7 billion for 20 percent. That could help trim the amount of debt Dell would have to take on and perhaps make the financing terms more palatable to debt investors.

 4. For EMC CEO Joe Tucci, this could be the exit strategy he has been seeking for years. His company has come under significant pressure from activist hedge fund Elliott Management to sell off parts of its business as well as make management changes to unlock shareholder value, mentions Re/Code. Tucci earlier hinted that EMC might be up in a consolidation. Last year, Tucci tried and failed to sell EMC to HP. Their talks ended with the latter splitting in two. Tucci also found no interest likely from other potential acquirers including Oracle and Cisco and so a Dell acquisition makes sense.

The challenges

A key concern for Dell is that while PCs are declining, the storage industry in itself is also under pressure. As more corporations adopt cloud storage and cloud computing for their IT needs, there is less reason to spend money on the costly software and hardware upgrades typically offered by established IT companies like EMC. Nonetheless, these legacy players are jumping into cloud services better compete against the lower-cost cloud service companies. For example, EMC itself spent $1.2 billion to buy cloud management company Virtustream.

But Robert Cyran of New York Times reported that EMC’s size is one challenge; the scale of borrowing needed is another. And there’s the complexity of spinning off part of EMC’s majority stake in its separately listed $35 billion subsidiary VMware.

Dell borrowed a lot in 2013 to finance its $25 billion buyout with some help from the private equity firm Silver Lake. The credit rating firm Moody’s estimated in February that Dell will have about $13.5 billion in combined debt on its books by the close of its 2016 fiscal year next January. Post-deal let’s call it a combined $53 billion.

Aaron Rakers of Stifel to Benzinga that a combination between EMC and Dell “would leave many questions “concerning operating and go-to-market synergies, and the companies’ view on an overall deep portfolio positioning or consolidation in a converging enterprise data center infrastructure landscape.

We need to watch out this space!