Dell Buyout, Phase II: Tara Lachapelleby
Here’s a name we haven’t heard from in a while: Dell. And how very Dell-like to make a big splash back into M&A two years after being at the center of one of the largest and most high-profile buyouts in history.
Michael Dell and Silver Lake Management seem to be ready for phase two of their revival of Dell’s eponymous computer company: a merger with EMC. Analysts are still trying to wrap their heads around the idea. It’s only a $50 billion-plus transaction, after all.
Financial feasibility aside, the timing couldn’t be better for EMC. Its standstill agreement with hedge fund Elliott Management recently expired, making the company vulnerable to another activist barrage. A deal with Dell may be a way to once again appease the investor and buoy a stock that’s lost 13 percent this year through Wednesday.
Reports of the merger discussions also surfaced a day after the initial public offering of EMC’s emerging rival Pure Storage. The $2.9 billion company is No. 3 behind EMC and IBM in selling all-flash storage systems that use chips instead of spinning magnetic disks for faster websites and applications. Don’t be fooled by its size; Pure Storage is a threat, with revenue projected to surge about 50 percent next year and 40 percent the follow year. That compares with growth forecasts of about 5 percent for EMC in each of the next two years.
Both these events signal that the time may finally be right for Dell and EMC to get together. As Jim Cramer put it Thursday morning, EMC would be admitting defeat and saying it really can’t grow much more on its own. But that’s OK, because it would also be providing an exit for shareholders ahead of another fight with Elliott over what to do with EMC’s controlling stake in VMware.
It remains to be seen how Dell pays for such a transaction, which is said to include the VMware stake. Dell has a ton of debt from its own buyout: Moody’s Investors Service estimates Dell will still owe in the neighborhood of $13 billion as of January 2016. It also has a junk rating. (EMC is investment grade).
When Moody’s gave its debt projection earlier this year, it also said that Dell’s annual acquisition spending would be limited to $500 million to $1 billion because so much of its cash flow would be used to pay down debt.
This may be why some analysts, including JPMorgan’s Rod Hall, see a deal more likely to be structured with EMC as the buyer, providing an exit for Michael Dell and Silver Lake.
Either way, the speculation helped drive EMC shares up more than 5 percent on Thursday at midday.
Mergers this size are risky, especially when both companies are coping with slowing demand. But if Dell really is a stronger company now than before the buyout, then Michael Dell and Silver Lake probably deserve the benefit of the doubt on this next move. For EMC, it beats another battle with Elliott, which really didn’t do anything for its stock.