Just a few days back, WSJ had reported that Dell may be on its way to takeover the data storage company EMC in a deal which could be anywhere around $50-$60 billion. According to recent developments reported by Recode, the deal could be announced as early as today.
The deal may come down to $30 per share including cash amounting to $27.25 per EMC share and the additional value of tracking stock to account for the value of EMC’s stake in the cloud software firm VMware. This would put the deal value to about $58 billion making it the biggest deal ever in any M&A in technology sector, far ahead of the pending deal between chip maker Avago technologies and Broadcom Corporation worth $38 billion.
The deal is speculated to give a boost to the efforts of PC maker to diversify its business from the declining PC market to enter into managing and storing data for enterprises. It will be a big step for Dell since 2013 when it delisted itself from the stock market to become a private company in a deal worth $25 billion with private-equity firm Silver Lake.
EMC makes software and hardware for high-efficiency data centers and is the parent company of the successful VMware. The VMware software which ‘virtualizes’ computer programs and data so they can run on any screen, is a service much in demand from big businesses and can prove to be highly beneficial to Dell. The VMware arm of EMC is worth over $28 billion in itself.
There are questions and doubts, nevertheless, about whether Dell is actually able to finance the deal given the fact that it has more than $11.7 billion in debt according to FactSet. Reportedly, the company is seeking to issue high-yield bonds that will be linked to equity in the combined company which is seen as a risky move by some due to proposed increase in interest rates by the U.S. Federal Reserve before the end of this year.
On the other hand, EMC too has lately been facing a lot of pressure from investors to raise its stock prices and especially from the $25 billion hedge fund Elliot Management to spin off its VMware arm. Before Dell, EMC was reportedly in talks with Hewlett-Packard for the buyout but the talks fell in between due to financial terms although both companies never acknowledged publicly that they were in talks.
EMC was once a renowned name in data storage especially in the 1990s when its shares were the best performers in the stock market. However with the advancements in technology and advent of new digital age, defined by cloud, mobile, social and big data, EMC has been struggling with the storage business.
According to regulatory filings, revenue growth at EMC’s storage division has slowed from a 16% increase between 2010 and 2011 to a 2% gain between 2013 and 2014. Moreover, its shares have fallen 13% this year and in July the company reported a 17% drop in quarterly profit and lowered its full-year outlook.