Recently, the PC-maker Dell Inc. (DELL) announced its purchasing offer to acquire the data-storage company EMC Corp. (EMC) in a $67 billion agreement.
EMC, together with its subsidiaries, supports the businesses and service providers to transform information technology operations to an as-a-service model (ITaaS). The company operates in three segments: EMC Information Infrastructure, Pivotal and VMware Virtual Infrastructure.
Dell and Silver Lake Partners finally agreed to buy EMC, including VMware (VMW), for $67 billion. The deal is a complicated financing structure that is one of the largest tech deals ever, and will create one of the largest privately-held corporations in the world.
EMC has been under considerable pressure to break up its business and last August, there were rumors that EMC would be bought by its own subsidiary, VMware. Now EMC has an 80% stake in VMware, and will continue to function as a publicly traded company.
Dell offers a range of technology solutions, including servers and networking products, storage products, services, software and peripherals, mobility products and desktop PCs. Thanks to aggressive marketing to institutional computer buyers, and close alliances with hardware and software manufacturers, Dell was the number one global PC vendor by market share between 2003 and 2006, but then it lost market share to Hewlett-Packard Co (HPQ) and other cheaper rivals.
It is a monumental step in Dell’s transformation from a PC maker into a wide-ranging, full-service technology company. Even so, some have called this merger a nightmare, remembering the merger of HP and Compaq, which finally ended with a fight. Dell will face multiple challenges for this ambitious quest including a heavy debt load to complete the deal.
Cloud companies like Amazon (AMZN) put much pressure on Dell, EMC, and VMware. Dell has already been hit hard by the sagging PC market, threatening its PC manufacturing business.
While the merger will be complex and costly to execute, there are some ways Dell will benefit, including the following:
- The payoff could help Dell broaden its enterprise business
- Dell will get an enormous cash flow stream with EMC
- Through this deal, the company will provide unmatched ability to address large and small customers’ rapidly changing IT needs.
About EMC Corp.
The company has a market cap of $49.39 billion with strong fundamentals.
Profitability and growth has been rated by GuruFocus as 8/10. Returns are positive and well-above the average performance of the Global Data Storage industry with ROE at 11.51% and ROA at 5.53%. Profitability is ranked higher than 89% of its competitors, with operating margin of 14.49% and net margin of 10%.
The company is paying its shareholders a yield of 1.80% with a very comfortable payout ratio of 37%; the yield has grown by 10.80% during the last year.
GuruFocus rates the business predictability as 4.5 stars out of 5. The DCF calculator gives a fair value of $23.26, meaning the stock is overpriced by 11%.
During the third quarter, the company was bought by two gurus. Brian Rogers (Trades, Portfolio) bought 4,780,000 shares with an impact of 0.51% on his portfolio and Ken Fisher (Trades, Portfolio) increased his stake by 39.96%. Dodge & Cox is the main guru shareholder with 3.73% of outstanding shares, followed by PRIMECAP Management (Trades, Portfolio) with 1.87% and the investor Paul Singer (Trades, Portfolio) with 1.75%.
