WALL STREET JOURNAL.
Deals & Deal
Debt Markets Hold Key to Dell’s Bold EMC Bid
Acquisition to require massive amount of debt
Dell and private equity firm Silver Lake are in advanced talks
to buy data storage company EMC, for what could be the biggest
technology-industry takeover ever.
Don Clark and
Updated Oct. 8, 2015 10:53
is pressing ahead with partner Silver Lake on a $50 billion-plus
acquisition of data-storage giant
EMC Corp., people familiar with
the matter said, a bold but risky deal that would require massive debt
financing at a time when credit markets have become less hospitable to
Negotiations have advanced and could produce an agreement by next week, the
people said. A merger of that size would be the largest ever in the
technology industry, and Dell and Silver Lake are in talks to secure a debt
package that could top $40 billion to fund it, one of the people said.
The recent rebound in markets has added urgency to the talks. Dell and its
advisers have been grappling in recent days with how to finance the takeover
at a time when markets are volatile and debt investors have balked at a
number of recent takeover-related offerings, another person said. They are
eager to get the deal done before credit tightens further, the person said,
and the improved climate has given them an opening.
The deal would mark an attempt by Mr. Dell to craft a future for a company
caught between the shift toward mobile devices such as
Apple Inc.’s iPhone and fierce
competition among providers of storage capacity and computing power. A
merger in theory could transform the PC and server specialist Mr. Dell took
private two years ago into a one-stop shop capable of serving a full range
of corporate computing needs.
A combined Dell-EMC would encompass computing, networking and storage—both
hardware and software—giving it the breadth to compete more effectively with
larger companies such as
International Business Machines Corp.,
Cisco Systems Inc. and
“Dell and EMC would be a tech behemoth,” said Daniel Ives, an analyst at FBR
Research. “It would change the landscape of enterprise computing.”
A deal wouldn’t answer all of the questions facing Dell or EMC. Some close
watchers of the tech scene feel that finding ways to unlock stock-market
value may outweigh any potential business benefits to the companies.
To cover the cost of a deal, closely held Dell and Silver Lake may also need
to come up with as much as $20 billion themselves, which they would likely
do in part by selling shares in EMC’s
unit, the people said.
which helped develop software that makes corporate data centers more
efficient, is seen as the crown jewel of the transaction. EMC currently owns
roughly 80% of VMware, which has a market capitalization of about $32
billion. Dell would likely hold on to a controlling stake after any sales,
the people said.
A merger with EMC would help Dell exploit a trend toward selling bundles of
hardware components together, known as converged infrastructure, which eases
the need for companies to assemble and test technology combinations
themselves. EMC helped pioneer that tactic in a joint venture with Cisco,
which now supplies networking and computing gear sold along with EMC storage
An acquisition of EMC would also give the company’s new owners a chance to
turn around its lackluster performance in recent years outside the glare of
public shareholders, much like Dell was. EMC shares rose 4.7% on news of the
possible deal Thursday to $27.18. Still, the stock is up 37% in the past
five years, versus a 76% gain in the S&P 500.
Mr. Dell, who founded his company in his college dorm room in 1984,
pioneered direct sales of computers based first on phone calls and later the
Web. The company later branched into servers, the mainstay computers used to
manage corporate operations, and more recently acquired storage and
Both Dell and EMC rely heavily on sales of hardware for corporate data
centers, a business expected to gradually decline as more operations are
outsourced to cloud-computing services operated by the likes of Amazon.com
Inc., Google Inc. and Microsoft Corp., said Toni Sacconaghi, an analyst at
Sanford C. Bernstein.
Spokesmen for Dell and EMC declined to comment on the deal talks, first
reported by The Wall Street Journal on Wednesday.
This has been a banner year for takeovers, one that has been characterized
by megadeals like Dell-EMC. There have been nearly $3.4 trillion of mergers
and acquisitions struck world-wide so far this year, according to Dealogic,
putting 2015 on pace to possibly be the best year ever for deal making.
Should credit investors willingly fund an EMC takeover, it would bode well
for other deals and could be a sign that the surge in M&A will continue.
Dell and Silver Lake, which helped take the PC and server maker private in a
$25 billion leveraged buyout in 2013, have assembled a group of lenders
including J.P. Morgan Chase & Co., Bank of America Corp. and Credit Suisse
Group to help them secure the debt portion of the deal, the people said. The
banks would provide a bridge loan that could later be replaced by
investment-grade bonds and syndicated loans, one of the people said.
Following record or near-record debt issuance in recent years that supported
the M&A surge, credit investors have lately become more fickle. In late
September, J.P. Morgan cut a planned high-yield bond sale backing Altice
NV’s purchase of Cablevision Systems Corp. by $1.5 billion, making up the
difference by selling more debt in the loan market. Leveraged loans are
viewed as safer than bonds because they are secured by corporate assets.
More recently, Goldman Sachs Group Inc. and J.P. Morgan struggled to sell
$1.2 billion of loans backing the leveraged buyout of online clothing
retailer FullBeauty Brands, investors said this week.
Photo: bazuki muhammad/Reuters
One thing working in Dell’s favor as it seeks to cobble together the outsize
debt package is EMC’s relatively limited debt load and its investment-grade
credit rating. The Hopkinton, Mass., company, had just $7.4 billion of debt
and $7.7 billion of cash at the end of June. Dell, meanwhile, had $11.7
billion in debt as of mid-September, according to FactSet, and is junk-rated
from both Standard & Poor’s and Moody’s Investors Service.
Mr. Dell and Egon Durban of Silver Lake are likely to sell as much as $10
billion of shares in VMware, which could leave them with just over 50% of
the software provider; roll over their combined stake in Dell and between
them and possibly others come up with another roughly $5 billion of cash,
one of the people said.
The talks come at a delicate moment for Dell. A trial concludes Thursday in
a Delaware court over whether Mr. Dell and Silver Lake paid a fair price
when they took the company private. Former stockholders with claim to about
37 million shares have argued the company was worth roughly double the
$13.75-a-share buyout price—a figure Dell rejects, citing headwinds facing
its PC business and the risks surrounding its shift toward more-profitable
At the high end, the difference amounts to more than $500 million, although
a dispute over whether certain shareholders are eligible could reduce that.
If Dell is forced to make a large payment, it could make its efforts to pay
for EMC that much more difficult.
—Shira Ovide and Liz Hoffman contributed to this article.
Dana Cimilluca at
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