It’s official. EMC and Dell announced this morning that they’ve signed an agreement for Dell to acquire EMC. EMC majority-owned VMware will be kept separate as a publicly traded company. Under the terms of the deal, EMC shareholders receive $24.05 per share in cash and “tracking stock linked to a portion of EMC’s economic interest” in VMware.
It’s estimated that EMC shareholders will receive about 0.111 shares of new tracking stock per EMC share they own, based on the number of outstanding EMC shares expected at the transaction’s close. Using VMware’s intra-day volume-weighted price from Wednesday, EMC shareholders will receive $33.15 per share of EMC they own, making the deal worth about $67 billion. The result of the combination will be the biggest private integrated technology company in the world.
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EMC downgraded for merger
In a report dated this morning, Jefferies analyst James Kisner and his team said they downgraded EMC from Buy to Hold because of the merger news. The note was written before the official announcement using last week’s media reports about it.
They said Dell’s acquisition of EMC is feasible “from a leverage perspective,” but they’re worried about how much debt will need to be raised in order to complete the transaction. They think EMC shares already reflected “some probability” of a Dell acquisition before the official announcement came this morning, so they see limited upside to EMC shares.
Nonetheless, shares of EMC moved higher in premarket trading this morning, climbing as much as 5.1% to $29.29 per share following the official announcement. VMware shares slumped by as much as 3.7% to $75.75 per share in premarket trading this morning.
Debt raise presents risk
The Jefferies team suggested that a price of $28 to $30 per share was more likely for a merger between Dell and EMC, although they said leverage suggested that the price could go as high as $31 to $33 per share. Of course now we know that the combined cash and stock deal is at the high end of that range.
They think it will be challenging for Dell to raise more than $33 billion in debt at “reasonable” interest rates, although they note that it won’t be impossible. From this morning’s announcement, we now know that MSD Partners, Michael Dell and Silver Lake Partners are leading the merger transaction.
The Jefferies team sees potential downside to EMC if the deal with Dell falls apart. The analysts also said they’d been waiting for a catalyst at EMC for some time, expecting management to “take more dramatic action to drive shareholder value.” The acquisition by Dell appears to be that catalyst, but they suggested other riskier options like a levered buyback could have been possibilities.
Dell could sell some units
FBR & Co. analyst Daniel Ives said he thinks Dell might sell off some non-core units in order to finance the deal while also sharpening the combined company’s focus. He suggests that Dell might sell the RSA division and the joint Pivotal initiative gradually as EMC’s and VMware’s core storage and cloud offerings are the “underlying attractiveness” of the transaction. He also expects “many of the non-core units” to be sold.
In terms of management, he expected Michael Dell to become CEO of the merged company because EMC CEO Joe Tucci is set to retire in February. From this morning’s announcement, we know Ives’ prediction was correct.