In what is the high water market of pure tech acquisitions, Dell has announced that it will be buying EMC in a 67 billion. Shareholders will see a two part deal: $24.05 a share in cash, and a tracking stock that represents VMware, the virtualization subsidiary that EMC controls, and holds 80%: 20% of the shares of VMware are public. Since VMware is a publicly traded company, EMC shareholders will get 0.111 shares of this new VMware tracking stock for each EMC share. The idea of a trading stock is to allow the value of the subsidiary to be represented independently of the financial situation of the parent.
The biggest questions surrounding the acquisition are the amount of debt being taken on to make it happen, and the state of the enterprise technology market.
It’s been estimated that Dell will have to take on more than $40 billion in new debt to finance this deal. Obviously, Michael Dell and his partners — Silver Lake and others that worked with him to take Dell private last year — believe this new debt, on top of the estimated $13.5 billion from privatizing Dell — can be paid off by the new combined entity. And EMC is likely to provide over $55 billion to Dell’s top line, making it the largest enterprise tech company, with combined flows of $80 billion.
EMC has been under the gun, with activist investor Elliott Management stirring up shareholder anger, and arguing that VMware should be spun out or sold off. Joe Tucci, EMC’s CEO was supposed to have resigned in February, but has stayed on to deal with the company’s travails. A rumored deal with HP fell through, which is perhaps why EMC’s board accepted what looks like a less rich offer from Dell.
Is getting bigger actually better, at this juncture in the market? It may lead to more runway in what looks to be a battle of attrition with Amazon on one side — Amazon made a barrage of announcements last week of new offerings in cloud computing to complement the company’s AWS — and open source software, like Hadoop, on the other.
Michael Dell is not one to shy away from making large bets, and it’s likely that this play will provide him and the new, expanded Dell with more strategic options and scope. But there is no doubt that the market he is growing large in is decreasing in overall size. PC sales are dropping steadily, and while Dell has remained the major player in that space — and shrinking less slowly than competitors — the overall trends are fairly clear. However, Dell is now the largest player in that market, and Michael Dell is likely planning on using the cash flow from a market in transition to transition the company into new — and growing — markets. The challenge is to manage that nimble transition over the next five or ten years with an $80 billion/year behemoth. He’s placed his bet, and we will have to wait to see how the chips fall.