When Michael Dell took over the reins of Dell and took the company private in 2013, one of the stated reasons was to gain new flexibility that wasn't possible as a publicly traded company. Today, Dell announced it would purchase EMC in a deal worth $67 billion that's already been hailed as the largest tech deal of all time. Michael Dell will become CEO of the new company, but it's not clear what role Joe Tucci, the CEO of EMC and chairman of the company, will play going forward.
Buying EMC gives Dell access to a huge market for information storage and virtualization technology. EMC owns companies like VMWare and Mozy as well as RSA Security. Dell agreed to pay a significant premium for the company through issuing new common equity, tracking stock, debt financing, and cash on hand.Activist shareholder pressure, or smart cloud positioning?
On the one hand, this looks like a smart move for Dell, which has made a determined long-term play to add more enterprise and business-class products to its portfolio and rely less on the ultra-low margins of the PC business. Buying EMC will allow the PC manufacturer to expand the types of services it offers and combine some of EMC's back-end infrastructure, virtualization, and cloud technology with its own enterprise hardware and services. By buying EMC (and therefore VMware), Dell can sell access to cloud computing or the hardware customers need to build their own local clouds running VMWare software.
VMWare revenue is a significant percentage of EMC's total sales, but it's been shrinking in recent quarters
The flip side to this, however, is that EMC has been under pressure from activist shareholders to consolidate and slash its engagements. Last year, activist shareholder firm Elliot Management took a 2% stake in the company and began urging it to sell VMWare. The WSJ reports that an agreement between EMC and Elliot not to publicly attack EMC's decisions expired last month. Activist shareholder firms typically have no interest in the long-term health of a company, but are instead focused on pumping up short-term valuation through buybacks and spin-offs to maximize their own profits.
The good news is that the merger with Dell makes far more sense than Qualcomm's recent decision to commit to huge stock buybacks and increased executive compensation while slashing jobs and contemplating spinning off its chip manufacturing. EMC and Dell make sense as a complimentary partnership, particularly given the growth of cloud services. Like HP, Dell has emphasized that this kind of pivot is necessary if the company is going to thrive -- prices on consumer hardware are simply too low to count on hardware sales for income, particularly as the market continues to contract. Unlike HP, which will soon split into two separate companies -- Hewlett Packard Enterprise, and Hewlett Packard Carcass Inc.
Despite the size and complexity of this deal, Dell has no plans to become a publicly traded company in the near future. According to Michael Dell, "This creates a world-leading company. The private structure gives us a tremendous amount of flexibility."Tagged In
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