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Does not compute

19 April 2016 By Jeffrey Goldfarb

The combined computing power of Dell and its targets, EMC and VMware, may not be enough to make the merger math for their $60 billion deal stack up. Six months after the Texas-based PC maker and its partners unveiled the complex transaction, the numbers involved are becoming even harder to reconcile.

The latest head-scratcher relates to anticipated synergies from combining Dell with EMC and its publicly traded subsidiary, VMware. Dell expects to slash annual expenses by $1.5 billion to $2 billion within two years, or between 7 percent and 9 percent of EMC’s operating expenses last year.

EMC Chief Executive Joe Tucci has said the revenue uplift from cross-selling will be three times bigger than the cost savings. That implies up to another $6 billion in new sales generated simply by having the businesses under common ownership – around a 7 percent increase to the combined top line of $74 billion.

Cost savings would be worth about $13 billion today, taxed at 25 percent and capitalized on a multiple of 10 using the midpoint of the range. Some portion of those will accrue to VMware, where about half the benefits will, in theory, go not to Dell but to former EMC shareholders who will receive VMware tracking stock as part of the consideration for the sale of EMC.

The rest, if not more, will be needed to cover the premium Dell is paying with the backing of private equity firm Silver Lake, Singaporean fund Temasek and Chief Executive Michael Dell’s investment arm. The deal consideration, by Dell’s math, is currently worth about $12 billion more than EMC’s undisturbed valuation last September.

That suggests the new owners are counting on the hefty revenue synergies to make the transaction profitable. The history of tech deals is ominous, though. Oracle, Hewlett-Packard and others have fallen short of sales-enhancing expectations. Even assuming Dell sells more hardware, prices could decline faster.

Dell already has tried selling its laptops to Fortune 1000 companies. Similarly, it’s not obvious why Dell’s small and midsize customers will all of a sudden want EMC’s storage and virtualization products. What’s more, in a merger-related filing Dell concedes that “cross-selling synergies have not been achieved as anticipated” in previous acquisitions. There’s little so far to suggest that this time will be different. 


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