Dell In Talks to Acquire EMC

PC hardware maker Dell, Inc. and EMC Corp. may be headed for a merger valued at upwards of $50 billion. According to reports from Reuters and The Wall Street Journal, Dell has entered talks with banks to finance an all-cash offer for EMC, the storage software giant that also owns 80 percent of cloud virtualization provider VMware, Inc.

The reports state a deal could be reached within the week, and the terms may constitute Dell spinning off VMware into a separate entity. Hedge fund Elliott Management Corp. took a two percent stake in EMC last year and had been pressuring the company to boost its falling stock prices. EMC held talks with Dell in September 2014 and previously discussed a merger with HP before it split into two companies (HP, Inc. and HP Enterprise), the Journal reported last year.

Dell went private in 2013 in a $24.9B deal with private equity firm Silver Lake. FBR Capital Markets analyst Daniel Ives believes the merger is a good move for Dell but would be a grave mistake for EMC. "It is crystal clear that, after years of its 'treadmill approach', Joe Tucci and the EMC board have their backs against the wall as activist investor Elliott Management appears to have put enough heat in the kitchen to force this mature stalwart to figure out a strategic plan after years of struggles," said Ives.

"Of all the options potentially on the table, we would view a merger with the now private Dell as a 'nightmare scenario' that would lack strategic synergies and further complicate EMC's troubled growth path," continued Ives. "While this merger makes a ton of sense for Dell as it transitions further into the enterprise landscape and away from its consumer roots, we believe EMC/VMware holders would still prefer a breakup of the antiquated Federated model and split."

Many questions in terms of the deal's financials and subsequent spin-offs still remain. EMC also owns software company Pivotal Software, Inc. and enterprise security company RSA in addition to its flagship storage business (including all manner of document management and identity management solutions as well as data protection and security solutions including secure managed file transfer services).

Ives believes EMC still has other options, including buying back the remaining 20 percent of VMware or selling only a minority ownership position to Dell. But he believes that, ultimately, it faces the decision of either splitting or merging with another mature tech company (in this case, Dell).

"While we believe EMC and Dell merging would change the tech landscape as the combined tech giant would aggressively go after the next generation storage and datacenter landscape in this land grab opportunity, ultimately, we have doubts that a complex deal with such high integration risks would end smoothly," said Ives. "We do believe that, with Mr. Tucci set to retire in the near future and with Elliott's standstill agreement ending in September, that the stage is set for EMC to make a move in the next few weeks one way or another."