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Dell to take EMC private

Nick Chase - October 13, 2015
Dell plans to buy out EMC for a total near $67 billion in cash and a "tracking stock" based on the performance of VMware. Theories about why range from the idea that the computer manufacturer has been targeting converged systems, and wants to add EMC's offerings to its arsenal as it battles HP and IBM, to Dell wanting to have a hand in VMWare, to a desire to be more of a "one stop shop" for enterprises that need both hardware and consulting.
Shareholders will receive $24.05 in cash per share, along with .111 of a "tracking stock" (worth approximately $8) in VMware, which will remain a publicly traded company even after EMC is taken private by the transaction. The tracking stock does not include voting rights, so Dell will retain control over the company even though its financial interest will drop from 81% to 28%.
The deal was negotiated personally by Dell CEO Michael Dell and EMC CEO Joe Tucci over the course of approximately a year. It will be financed with equity from Michael Dell, MSD Partners, and Silver Lake.
Both companies have seen their fortunes shift in the past few years, as cloud computing has become increasingly popular, and both have attempted to maintain their relevance by getting involved.  EMC recently purchased OpenStack firm CloudScaling, and in 2010 Dell bought cloud services broker Boomi. Both companies are also significant contributors to OpenStack and sell private clouds to their customers.

Pressure to disband the federation

EMC has been getting pressure of late from an activist investor and 2% stakeholder, Elliott Management, to divest VMware, and "unlock" some value for shareholders.
In January, EMC negotiated a cease-fire in that particular battle with Elliott Management, appointing two new directors to its board, but that deal expired on September 1 and Elliott has not been willing to reinstate it. EMC actually consists of a "federation" of companies, including VMware, Pivotal, and RSA, and some pundits feel that "Any potential acquiree knows EMC is negotiating because it has an Elliott Management gun pointed to its head and needs a white knight," asThe Register put it. “This is a terrific outcome,” Jesse Cohn, Elliott’s head of equity activism in the United States, said in a telephone interview with the New York Times. “As activist shareholders, it’s hard to find any fault in this process.”
Michael Dell told CNBC that he feels that it didn't make sense to break up EMC, as the whole was greater than the sum of the parts.
The federation structure "has been applauded for allowing the parent company to reap the benefits of the newer companies’ success without impeding their innovation,"according to Fortune. It was championed by Joe Tucci, who has delayed his retirement (he's just 67) while all of this has been going on and has not chosen a successor. Tucci will remain in the Chairman and CEO spot until the deal closes in mid to late 2016, when Michael Dell will take over.

The Dell/EMC acquisition and the rest of the IT industry

And then there's the rest of the industry. The Register quoted William Blair's Jason Ader as saying "A potential EMC-Dell merger would represent the first major domino to fall in what we believe will be a fundamental restructuring and consolidation of the IT infrastructure industry. ... A deal of this magnitude would also effectively 'blow up' the current IT chess board, forcing the hand of other incumbent vendors to gain greater scale and/or assemble vertically integrated stacks."
So what does that mean, actually?
Well, for Cisco, it means EMC would no longer need to partner with them for servers, so Cisco would need to find another storage partner, particularly after shuttering Invicta in July. Currently, the company has been relying on partners, but it may also solve the problem with an acquisition. But what? NetApp may come immediately to mind, butaccording to CRN, "Solution providers said they wouldn't like to see Cisco seek out a partnering company such as NetApp, but rather an 'immediate play' for vendors like object storage software developer Scality or all-flash storage array vendor SolidFire." Analysts estimate that Cisco would have about 18 months to come to market with a hyper-converted solution, should the Dell/EMC deal go through. Analysts also say that the deal would officially end Cisco's participation in VCE, which has reportedly been hanging by a thread for some time, as Cisco reduced its ownership to only 10%, and VCE introduced NSX networking in addition to Cisco's ACI.
IBM might also feel a bit of a pinch here, as it competes for many of the same customers as Dell in the $33 billion a year IT infrastructure market, and the new combined company would be massive.
Perhaps the most interesting implications are for HP. Currently the market leader at 16.3% of the IT infrastructure market, it would drop to second place behind the new company, which would hold 18%. The amount of "cost synergies" the companies might find is debatable (their product lines are complementary, rather than competing) but there's no doubt that talk of a Dell/EMC acquisition creating a "behemoth" is not taken lightly. Of course, that may not be a Bad Thing for HP; one of the reasons it's splitting off HP Enterprise is to become more nimble, so bigger isn't always better. In fact, in a statement released this morning, an HP spokesman said:
“This is a real opportunity for HP.  Two of our largest competitors are attempting a highly distracting, multi-year merger, just as we are launching two new, focused companies.  The massive debt burden Dell and EMC are taking on undoubtedly means that they will have to radically reduce R&D, and integration inevitably will create disruption as they rationalize product portfolios, channel programs, and leadership.  While Dell and EMC are sorting out their future, Hewlett Packard Enterprise and HP Inc. will be working to take share and advance our technology leadership in key areas like converged infrastructure, private cloud, all-flash storage, personal systems and printing.”
Several months ago, HP was in talks to buy EMC but balked on price. AsThe Register put it, "There is a theory that the stories are based on leaks intended to get HP back to the deal table after it reportedly walked away. Hey, HP, fancy competing with a Dell-EMC combo? No? Better get your wallet out and pre-empt it."
The deal does include a 60-day "go shop" provision that will allow EMC to back out of the deal should it find a better suitor, but analysts agree that this appears to be highly unlikely.


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