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Hairball M&A

8 October 2015 By Robert Cyran

Dell’s gnarly idea to buy EMC smells of peak M&A. The privately held PC maker may offer to buy the $50 billion publicly traded data-storage firm, according to news reports. 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.

EMC styles itself a three-part “federation” composed of data storage, VMware’s server and network virtualization business, and cloud-software company Pivotal. In reality it’s a technology conglomerate, and investors value it that way. Data storage is a cash cow, but under threat. Pivotal is growing fast. VMware, meanwhile, is doing well but it’s arguably too dominant – EMC’s 81 percent stake accounts for more than half its total market capitalization.

The simplest response would be a three-way split of EMC, as activist investor Elliott Management proposed last year. A purchase by Dell would be far more convoluted.

Dell, taken private two years ago for $24 billion by eponymous founder Michael and private equity shop Silver Lake, would be taking a huge bite to go after EMC. With a premium, the price tag could be well over $60 billion. Raising $40 billion or more in debt markets would be tough, too, even if EMC’s cash flow could be tapped to support it.

Spinning off VMware to EMC shareholders in its entirety could cut the deal size by half. But VMware is probably the most attractive asset – Dell already has a storage unit. If Dell wanted to keep a 51 percent economic interest in VMware, it could spin off about 30 percent of the company, worth about $10 billion. A deal trimmed by that much would, however, still be ambitious – and that’s before taking additional steps to optimize EMC.

Like huge hostile offers and mergers that antagonize antitrust watchdogs, Dell’s interest in EMC smacks of the frothy tail-end of an M&A cycle, when complex deals with non-obvious benefits swing into view. An analyst at Bernstein even sketched out a transaction involving a reverse Morris Trust, a rare tax-driven mechanism that has jinxed deals in the past. While Dell overcame plenty of hurdles to go private, an attempt to make a merger with EMC work for everyone involved could be a step too far.


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