Analysis: Making sense of the Dell-EMC mega-merger

• A bigger, less-scrutinised company better for shareholders, partners & customers
• Merger struggles include culture, cloud strategy, long-term asset integration

ANALYSIS MICHAEL Dell has been a busy man.
 
Two years after fighting tooth and nail to wrest back control of the eponymous company he founded three decades ago in his dorm room at the University of Texas, the 50-year-old self-made IT magnate made huge headlines recently with an aggressive move to buy storage giant EMC Corp.
 
The cash-and-stock merger and acquisition (M&A) deal announced on Oct 12 is worth a whopping US$67 billion and is believed to be the largest ever in the history of the tech sector, and the third largest in all sectors.
 
The M&A not only includes control of EMC but several other smaller companies, including its crown jewel, virtualisation and cloud player VMware Inc.
 
Prior to this deal, the largest acquisition in the technology industry was Avago Technologies Inc’s US$37-billion offer for Broadcom Corp in May.
 
Essentially, Dell Inc’s buyout of EMC involves two major parts. The deal, subject to regulatory approval, means that Dell gets EMC and all its subsidiaries while EMC will be delisted from Nasdaq.
 
The second part involves issuing ‘tracking stocks’ for VMware, as EMC only owns 81% of VMware, which is in itself is publicly traded.
 
Rather than just handing over traditional stocks, tracking stocks enable Dell to issue securities designed to mimic shares of VMware that are already publicly traded.
 
In effect, EMC holders get a market for shares they couldn’t previously touch – although they will not exactly own them either, as explained by Bloomberg.

The buyout surprised many industry watchers, not the least because of the size of the deal, but also because of the timing of the merger. Analysts were taken aback as the Dell-EMC M&A would saddle Dell with an enormous debt of an estimated US$40 billion.

This comes after the Round Rock, Texas-based Dell had already incurred significant debt going private in 2013, to the tune of US$24.4 billion.
 
But in reality, the M&A is not really shocking as the media had already reported that EMC was courting a right suitor for a possible M&A as far back as 2014.

In September that year, the Wall Street Journal (WSJ) reported (registration required) that the Hopkinton, Massachusetts-based EMC had already held on-and-off merger discussions with rival Hewlett-Packard Co (HP), but that the deal fell through.
 
Interestingly, there were talks with Dell at that time, but nothing came of them either, the business daily added.
 
It was not until the World Economic Forum this year that Michael Dell and EMC chief executive officer Joe Tucci made serious headway in trying to seal the deal, according to The New York Times.

The deal was over a year in the making, and involved dozens of people, including power brokers from investment bank JPMorgan Chase & Co and private equity player Silver Lake Partners crisscrossing the country in a bid to finalise talks, The Times noted.
 
Eventually, Reuters broke the news that the acquisition was about to come together four days before the official announcement. But while Tucci and Michael Dell were expectedly upbeat about the deal, the industry had mixed reactions to it, according to Fortune.
 
HP chief executive officer Meg Whitman went even further, panning the deal and arguing, amongst other things, that the interest – estimated to be US$2.5 billion – just to service the M&A debt did not make sense.
 
In a bid to rally her troops, she also made a clarion call for HP to “get out in front of our customers and partners, tell them our story and take advantage of this moment,” alluding to the opportunities HP ostensibly has over Dell-EMC during this time of consolidation.

Michael Dell of course fired back, saying that Whitman had “some of the facts wrong,” and that he preferred to “let the facts [of the deal] speak for themselves.”
 
‘Bigger is better’

Dell World 2015, held last week in Austin, Texas, suddenly became the focal point for everyone from customers and partners, to the media and analysts.
 
All eyes were on Michael Dell (pic above) and how he would make sense of the mega acquisition. But while he spent a lot of time on stage – also taking the opportunity to dis Microsoft’s new line of Surface devices – his explanation was somewhat lost within the enormity of the mega deal.

According to many press and analyst reports following his speech, as well as my own reading of the livestream keynote address on Oct 21, Michael Dell’s main focus in explaining the acquisition was centred on two fundamental beliefs.
 
The first is found in the mantra ‘bigger is better,’ a concept he spoke about a day before his keynote on Oct 20; while the second is focused on the fact that Dell could do with EMC what it wishes to, without the scrutiny of the stock market.
 
Alluding to what makes this deal special, Michael Dell said customers are getting a “dream combination” in Dell-EMC and that both companies “complement each other beautifully” because they are leaders in their respective fields.
 
He also declared that “no one [other than Dell-EMC] is more relevant and more able to add value [to its customer base].”
 
According to Michael Dell, customers today want a one-stop shop and the ability to deal with a company that has the breadth and scale like Dell-EMC.
 
“We bring an unbelievable set of capabilities [to our customers],” he argued. “We are the world’s largest enterprise systems company with revenue in excess of US$80 billion.
 
“Put simply, we have the best innovation, the highest quality and the greatest value, and we believe a Dell-EMC combination offers unique value, which is good for Dell, EMC and our customers.”
 
As to escaping the scrutiny of the stock market, Michael Dell cited a Fortune magazine survey which stated that 84% of CEOs (chief executive officers) believe it would be easier to manage a private company.
 
“Dell-EMC is all under a private company structure, and it’s investing for the long term with no 90-day shot clock,” he said, referring to a basketball terminology he had used before.
 
“We have complete alignment from our customer-focused innovation, investment in research and development (R&D), [to our] leadership in ownership … and we are 100% focused on you [the customer].”
 
Michael Dell’s high spirits on the mega-merger are expected, but according to an advance interview given to tech blog Re/code on Oct 20, his confidence is not unfounded as he and his private equity partners have thought long and hard about the deal.
 
“We’ve spent a lot of time studying this, and we think we know everything that could go wrong, and we think we’ve [taken] steps to guard against those things,” he said, in response to a KPMG study which showed that mega-mergers almost always fail to boost shareholder value.
 
Michael Dell is also sure that taking over EMC will be a plus point because EMC is a leader in its enterprise landscape and can open up many doors for Dell Inc, which is traditionally focused on the small- to mid-market segment, Re/code noted.
 
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