Dell to Buy EMC as Competition Intensifies

Dell Inc. agreed to buy EMC Corp. for about $67 billion in the largest technology acquisition ever as Michael Dell looks to leverage EMC’s dominance in storage devices amid intensifying competition.

The computer maker plans to pay $24.05 a share in cash plus tracking stock in EMC’s prize holding, software maker VMware Inc., valued at about $9 for each EMC share. EMC’s stock climbed 1.8 percent Monday to $28.35. Dell will add almost $50 billion to its debt load to complete the purchase, people familiar with the matter said, on top of the $11 billion it already is carrying.

The deal, which founder Dell is funding with partners such as Silver Lake, will help the personal-computer maker broaden its product lineup to respond to enduring threats from perennial rival Hewlett-Packard Co. and upstarts such as Nutanix Inc. For EMC, the combination may mollify activist investors clamoring to see more growth.

“From EMC’s perspective, this is a great deal. They couldn’t have worked it out better,” said Rajesh Ghai, an analyst at Macquarie Group Ltd. “Eventually, big customers are going to want to buy from fewer suppliers, and if you have everything under the same roof, you have a better chance.”

The purchase price of $33.15 a share is 28 percent above EMC’s closing level on Oct. 7, just before reports of a deal surfaced. While the agreement has a provision that lets EMC talk to other potential bidders, the company doesn’t expect any, a person familiar with the matter said.

The combined company will be run by Michael Dell, the chief executive officer of the company he founded and took private for about $25 billion two years ago. He is financing the takeover with his MSD Partners investment vehicle, Silver Lake and Singapore state-owned investment company Temasek Holdings. He also is using debt, the VMware tracking stock and cash on hand.

The deal will combine EMC’s dominance in devices that store data with closely held Dell’s No. 2 position in servers, the powerful machines that help companies handle big computing challenges.

Morgan Stanley was EMC’s lead financial adviser, according to a statement Monday. Evercore Partners and Needham & Co. also worked with EMC. JPMorgan Chase & Co. advised Dell and Silver Lake.

Dell could pay its bankers $75 million to $95 million in advisory fees, according to Freeman & Co. EMC’s fees could tally $90 million to $125 million.

Financing fees for Dell could be much higher, according to Lam Nguyen, a director at New York-based Freeman. Assuming $40 billion in leveraged loans to support the acquisition, arrangement costs could end up in the $500 million range, he said.

For EMC, the agreement also addresses pressure from activist investors such as Elliott Management Corp., who have been agitating for growth and resolves long-standing questions over succession for CEO Joe Tucci. He has agreed to stay at the company through the close of the deal and may stay longer, the person familiar with the matter said. The Dell CEO contacted Tucci about a year ago, and the companies’ boards started working on the agreement in the spring, said the person, who asked not to be named because the details haven’t been disclosed.

EMC, which has been publicly traded since 1986, had been looking at strategic options for boosting its share price. Elliott had pushed both behind the scenes and publicly for EMC to sell itself and spin off VMware, of which the storage company is the majority owner.

“EMC’s board and management really delivered for shareholders,” Jesse Cohn, an Elliott portfolio manager who heads its U.S. activist efforts, said in an interview. “This is all you can ask for. They were relentless and creative in getting to the best possible answer for the company’s owners.”

EMC is facing weaker demand for its older, pricey storage models. While the company has been focusing on newer products such as flash arrays that speed up data retrieval, where it’s growing more rapidly, that hasn’t been enough to lift sales growth. EMC’s revenue is projected to increase about 3 percent this year, its slowest rate since logging a decline in 2009, according to data compiled by Bloomberg. EMC has benefited from a well-timed acquisition of VMware for $635 million, which resulted in a more than a 42-fold return on its investment.

The deal will help Dell raise its profile in data centers, the modern factories of the digital age that house servers, networking gear and storage systems. EMC had 21 percent of the storage market last year, about twice what Dell had, according to data compiled by Bloomberg. While Dell has been outperforming some of its rivals, the company is grappling with sagging demand for personal computers. During the third quarter, overall shipments declined 7.7 percent, according to Gartner Inc. Still, Dell was able to post a small gain of 0.5 percent while larger rivals declined.

VMware declined 8 percent to $72.27 on Monday amid concern that the creation of a tracking stock will weigh on the company’s valuation. Analysts at Mizuho Securities USA Inc. lowered their target price for VMware to $75 from $95. EMC rival Pure Storage Inc. rose 8.8 percent to $18.06, exceeding its public offering price of $17 for the first time since shares began trading Wednesday.

Dell’s CEO will plan to increase his holdings in VMware over time, VMware CEO Pat Gelsinger said on a conference call with reporters.

Down the line, the plan is for VMware, EMC and their Pivotal joint venture to be public companies, Tucci said. The companies expect the combination of Dell and VMware could boost sales by $1 billion over the next several years, he said. The deal is more about building sales than cutting costs, Tucci said.

Dell plans to pay down debt from the deal in the first few years, using revenue gains from the combination and cash flow from the various assets, CEO Dell said on the call.

Dell has been investing in growth after escaping the harsh glare of the public markets in 2013 with CEO Dell and Silver Lake Management LLC striking a deal to go private. At the time the deal was announced, the stock had lost more than half its value since January 2007, when Dell resumed his role as CEO.

For all its would-be benefits, the merger carries risks. The prevailing trend in technology is to separate and focus on fewer businesses to compete against nimbler competitors. Hewlett-Packard is splitting in two next month, a step that EBay Inc. took earlier this year. Though Dell and EMC have done business together for years and have complementary cultures, the size of a combined entity could slow decision-making and hamper speedy product development.

What’s more, EMC bonds came under pressure last week on concern that the purchase would undermine current bondholders’ place in the capital structure.

Dell will keep its headquarters in Round Rock, Texas. Its enterprise-systems business will be based in Hopkinton, Massachusetts, the current home of EMC. The deal is expected to close by October of next year.

EMC also reported preliminary earnings for the third quarter, saying that profit excluding certain items will be 43 cents a share, less than the 45-cent average estimate of analysts polled by Bloomberg. VMware said its profit before items will be $1.02, compared with an estimate of 99 cents.

 

--With assistance from Beth Jinks in San Francisco.