According to knowledgeable sources that spoke to the Wall Street Journal on Wednesday, PC maker Dell and storage giant EMC are in advanced discussions regarding a merger or a purchase by Dell of part or all of rapidly growing storage and data management firm.
The WSJ sources note a deal with EMC could be just a few days away, but its also possible a deal will not be reached. Of note, the deal apparently being currently discussed calls for the purchaser to spin off EMC’s VMware Inc.
Analysts weigh in on Dell – EMC deal
Analysts from several research firms, including Credit Suisse, Jefferies and AB Bernstein, have issued reports or notes to investors about a potential deal between the two tech titans in the last day or so.
Credit Suisse analyst Kulbinder Karcha and team believe the management and board at EMC continue to seek all possible avenues to increase shareholder value. They say that this a Dell – EMC deal makes sense to them and EMC remains a solid Outperform. “We reiterate our belief that EMC’s stock works in almost all scenarios and see a probability-based TP of $34, with upside to $38 and downside to $26. We believe EMC remains one of the best-positioned IT HW companies, with an option-rich future (see Solving EMC Squared).”
Karcha et al. argue that a Dell – EMC deal could be structured in several ways. First, Dell could just buy EMC, but given EMC’s market cap of $50 billion, that would be a very large transaction.Second, Dell could acquire EMC and spin off one of the assets (VMW?). Third, Dell could just purchase the Storage asset of EMC (EMCII).
CS Exhibit 1 makes it clear that all three scenarios do support a SOTP argument, with a valuation of $30 or more (close to $13 for EMC II, $14 for VMW, and $3 net cash per share).
The Credit Suisse team does buy into the “rumor”, and says a Dell-EMC tie up makes sense on several levels. They argue most of Dell’s motivation in going private was to move operations beyond PCs and transition the firm into a high value Enterprise hardware and software-based model. Karcha and colleagues note: “Given Dell’s historic GM of 21%, EMC storage’s GM of 53%, and a revenue base of $19bn added to Dell’s Enterprise server, and storage business, critical scale would achieved, improving Dell’s converged infrastructure position.”
Setting a value on EMC is tricky given all the possible variables involved. The storage giant could buy in VMware, sell the entity, or choose to pursue M&A. Taking the various possibilities into account, the CS analysts model a probability weighted upside to $34, and a risk reward of $38 to $26. They also confirm their Outperform rating on the stock.
Jefferies says outright purchase of EMC by Dell is unlikely
An October 8th Flash Note from Jefferies suggests that a straight up purchase of EMC by Dell is not likely. Jefferies analyst James Kisner and colleagues point out that Dell went private in a $25 billion deal not long ago, and still has close to $12 billion in debt on the books. Given EMC’s market cap is almost $50B and has a $43B enterprise valuation, and the fact that $10.9B of EMC’s $14.8B in cash is banked overseas, it’s hard to see Dell coming up with the cash for a deal of that size.
Kisner et al note: “We believe a a large debt raise to fund a takeover/LBO would be quite difficult; we note that Altice recently had to pay higher than expected interest rate for the $8.6B in debt it raised to fund its acquisition of Cablevision. Dell buying EMC and spinning out VMW seems more financially feasible; however, we think VMW is critical for EMC or a combined EMC/Dell to successfully navigate the long-term transition in technology to the public and private cloud.”
AB Bernstein skeptical about Dell – EMC deal
Senior analyst A.M. Sacconaghi, Jr. and colleagues at AB Bernstein say that Dell does not have the finances to purchase EMC, even assuming a spin out of VMW. They note that even with a spin out of VMware, Dell would still have to pony up at least $25 billion for EMC including a premium for EMC shareholders, which they argue is just too much debt for Dell to take on.
Sacconaghi et al. also point out that “it is unclear how compelling EMC without VMware would be to Dell, particularly since Dell has its own storage line-up.”