Dell's $67B EMC Offer Only a 19% Premium on Market Cap

By Tara Seals October 14, 2015

EMC Corp. is planning to look for other suitors, even though its $67 billion merger with Dell is officially announced. But could EMC command more? The answer is, probably not.

According to people familiar with the matter, EMC asked for a “go-shop” provision to be included in the merger agreement. That means that it can look around for a better deal. If it finds one, it will pay Dell a breakup fee and be free to pursue the new path.

The move is not, as it would appear on the surface, because EMC’s management is anti-Dell. But its shareholders are reportedly not convinced that Dell’s offer is as high as the company could command. EMC’s activist investor, Elliott Management, may be a prime mover behind this.

“[CEO] Joseph Tucci is preparing to exhaust all arguments to convince the company's shareholders that a deal with Dell is the best possible outcome for them,” the sources said.

Image via Shutterstock

While the acquisition will be the largest technology sector deal on record, and $67 billion is not chump change, it should be noted that EMC has a market capitalization of $53.6 billion. That means the merger price represents only a 19 percent premium. Meanwhile a 44 percent premium is the norm, according to a recent academic study on how mergers work.

However, there’s a reason for that: The computer server, data storage and networking gear segments are overlapping pieces of the two companies’ lineups that would see consolidation with the merger. These are critical technology pieces and aren’t going anywhere, but they’re also all mature markets that aren’t growing at particularly fast rates, especially as companies continue to migrate their infrastructure to the cloud. EMC’s earnings report this week showed only an 8 percent uptick in revenue.

So, even though EMC market leader in data-storage hardware, what Dell is likely really interested in is its controlling interest in VMware, which will boost Dell’s data center and virtualization market bid.

Network function virtualization (NFV) and the cloud is a growing part of Dell’s focus as it moves beyond the PC and server business. With VMware and EMC, it can offer the whole virtualization stack, from white box servers on up, plus the market-leading storage options from the EMC portfolio. But to get to VMware, Dell had to buy its parent—and clearly wasn’t interested in overpaying for it.

That conservatism was borne out when VMware preannounced third-quarter results this week. Revenue, operating margin and EPS were ahead of expectations and revenue of $1.672 billion actually exceeded the high end of the guidance by $7 million. However, despite income statement outperformance, billings came in less than expected at 3 percent year-over-year growth versus analyst estimates for 9 percent year-over-year. Constant-currency billings growth was just a disappointing 8 percent year-over-year.




Edited by Kyle Piscioniere

Contributing Writer

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