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So numbers from the article: Dell went private in 2013, valuing itself at $23B. EMC has a market cap of $53.6B (Dell would have to pay some sort of premium on t

So numbers from the article: Dell went private in 2013, valuing itself at $23B. EMC has a market cap of $53.6B (Dell would have to pay some sort of premium on this). Dell is raising $40B in debt to finance the purchase. Let's say Dell pays a 20% premium on EMC and buys it for ~$65B. Let's also say that Dell's market cap has increased somewhat since 2013, since the market has generally been a bull market. Let's say that their $25B valuation is now $30B. So the companies combined have a valuation of $95B, with $40B in debt. They both seem like high cash flow, low margin businesses. I'm very curious to see the manner in which (by which I mean the degree to which they will use questionable financial engineering) they use these "business assets" to drive home a favorable financial outcome for the stakeholders.

crapshoot101 11y ago
Its a fair point, but its a little bit more complex than that. For example, EMC's valuation is really dominated by VMWare, of which it owns 80% (indeed, much of the strategic discussion around EMC before Dell emerged had focused on a merger where the parent bought out VMWare or the other way around). VMWare is currently trading ~$33B; Dell could easily take a portion of that stake that EMC owns (say, 25% of that 80%, which would still allow it to maintain majority control) and put that out in the market and generate ~$8B or so (maybe more). Moreover, they could (and probably will) spin off business units that they have less interest in (speculating here, but RSA?). Because EMC has had this traditional federation model, the spinoff / sale of business lines is probably easier than in most areas. No matter what, the debt overhang is still large, but its definitely not as large as it appears at first glance.
kumarm 11y ago
I think existing Shareholders will hold onto VMWare Tracking Stock making the purchase less than 50B.
CrazyCatDog 11y ago
Dell has maintained a relatively legit bond rating...this will certainly change things. Their cost of capital will increase, and I'm not quite sure I ne'er stand the strategic value in the acquisition... Why not just partner/jv it?
- vessenes 11y ago
  See my post below. How do you propose Dell stay relevant against the Quanta's of the world without an aggressive cloud offering that looks up to scratch with at least Azure? The business could easily be worthless in N years without this. I actually thought this was a smart plan, one I wouldn't have thought of until I heard the news.
- einrealist 11y ago
  Maybe, they will transform from a hardware to a cloud infrastructure company. Because many companies are moving applications into the cloud and buying less servers or or just avoid or give up on custom data centers at all. VMWare may be the key.
  - derefr 11y ago
    I get the sense that everyone in the big-metal hardware market (Dell, HP, IBM) is scared of something like Open Compute driving them to irrelevancy. They're all teching up to own some key piece of the IaaS space instead. VMWare is a nice keystone for that.
    - xorcist 11y ago
      VMware is also scared of SDNs and public cloud infrastructure. They try to remain relevant, and they may have an easier path forward than Dell and HP, but their business model is built on virtualizing old Windows boxes. It's the stepping stone for businesses as they virtualize their infrastructure. Just move off physical boxes and into the VMware cloud. But that's quite different from native-cloud applications. Right now you may need to incorporate VMware in your deployment toolchain, but it won't stay that way forever. None of the big public clouds (Google, Amazon etc.) run on VMware, and I wouldn't want to bet on internal virtualization infrastructure going the other way.
      - Karunamon 11y ago
        Furthermore, integrating anything VMWare without paying extra for their (clunky, limited) solutions is painful. I say this as someone that's writing a deployment toolkit for internal use. Their API is an ill-thought-out, illogical, and painful mess, and the more cynical side of me believes it to be that way on purpose. It's harder to get commoditized if you're harder to interop with. Then again, it could just be cultural. It took years of people complaining about the awfulness of their web based admin tool before they decided to take those complaints onboard and deal with them; and those were the admins who have to use the thing every day, a much louder and larger group than annoyed developers.
baruch 11y ago
The article says Dell intends to pay $25 per share when the current trading price is $27. That's not a premium, that's a discount. Edit: Looks like I misunderstood the terms. It's $25 plus a tracking stock for VMWare that is valued at $8 for a total of $33 which is a nice premium.

crapshoot101 11y ago

Its a fair point, but its a little bit more complex than that. For example, EMC's valuation is really dominated by VMWare, of which it owns 80% (indeed, much of the strategic discussion around EMC before Dell emerged had focused on a merger where the parent bought out VMWare or the other way around). VMWare is currently trading ~$33B; Dell could easily take a portion of that stake that EMC owns (say, 25% of that 80%, which would still allow it to maintain majority control) and put that out in the market and generate ~$8B or so (maybe more). Moreover, they could (and probably will) spin off business units that they have less interest in (speculating here, but RSA?). Because EMC has had this traditional federation model, the spinoff / sale of business lines is probably easier than in most areas. No matter what, the debt overhang is still large, but its definitely not as large as it appears at first glance.

kumarm 11y ago

I think existing Shareholders will hold onto VMWare Tracking Stock making the purchase less than 50B.

CrazyCatDog 11y ago

Dell has maintained a relatively legit bond rating...this will certainly change things. Their cost of capital will increase, and I'm not quite sure I ne'er stand the strategic value in the acquisition... Why not just partner/jv it?

vessenes 11y ago
See my post below. How do you propose Dell stay relevant against the Quanta's of the world without an aggressive cloud offering that looks up to scratch with at least Azure? The business could easily be worthless in N years without this. I actually thought this was a smart plan, one I wouldn't have thought of until I heard the news.
einrealist 11y ago
Maybe, they will transform from a hardware to a cloud infrastructure company. Because many companies are moving applications into the cloud and buying less servers or or just avoid or give up on custom data centers at all. VMWare may be the key.
- derefr 11y ago
  I get the sense that everyone in the big-metal hardware market (Dell, HP, IBM) is scared of something like Open Compute driving them to irrelevancy. They're all teching up to own some key piece of the IaaS space instead. VMWare is a nice keystone for that.
  - xorcist 11y ago
    VMware is also scared of SDNs and public cloud infrastructure. They try to remain relevant, and they may have an easier path forward than Dell and HP, but their business model is built on virtualizing old Windows boxes. It's the stepping stone for businesses as they virtualize their infrastructure. Just move off physical boxes and into the VMware cloud. But that's quite different from native-cloud applications. Right now you may need to incorporate VMware in your deployment toolchain, but it won't stay that way forever. None of the big public clouds (Google, Amazon etc.) run on VMware, and I wouldn't want to bet on internal virtualization infrastructure going the other way.
    - Karunamon 11y ago
      Furthermore, integrating anything VMWare without paying extra for their (clunky, limited) solutions is painful. I say this as someone that's writing a deployment toolkit for internal use. Their API is an ill-thought-out, illogical, and painful mess, and the more cynical side of me believes it to be that way on purpose. It's harder to get commoditized if you're harder to interop with. Then again, it could just be cultural. It took years of people complaining about the awfulness of their web based admin tool before they decided to take those complaints onboard and deal with them; and those were the admins who have to use the thing every day, a much louder and larger group than annoyed developers.

baruch 11y ago

The article says Dell intends to pay $25 per share when the current trading price is $27. That's not a premium, that's a discount. Edit: Looks like I misunderstood the terms. It's $25 plus a tracking stock for VMWare that is valued at $8 for a total of $33 which is a nice premium.