Coverage: Dell to buy EMC for $67 billion

It was rumored to be the largest deal of its kind, and on Monday morning, Dell Inc. confirmed it would buy EMC Corp. in a record breaking deal. Valued at roughly $67 billion, the deal provides EMC shareholders $33.15 per share, or a 27 percent premium since the deal was first speculated.

Lisa Beilfuss of The Wall Street Journal had the morning’s news:

Dell Inc. and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock, marking one of the largest technology-industry takeovers ever.

The $33.15 a share price tag represents a 19% premium over Friday’s closing price for EMC.

Dell said it expects to fund the deal through a combination of new common equity from Chief Executive Michael Dell, Silver Lake and other, the issuance of tracking stock, as well as new debt financing and cash on hand. There are no financing conditions to the closing of the transaction, Dell said. Dell recently reported that it had about $12 billion of debt.

The companies expect to complete the transaction between May and October of 2016. Dell said the combined company “will focus on rapidly de-levering” in the first 18 to 24 months after the deal closes.

The Wall Street Journal had reported last week that the companies were in talks to merge.

Joe Tucci, EMC’s long-time Chief Executive, will be chairman and CEO of EMC until the transaction closes. Upon completion, Mr. Dell will lead the combined company as chairman and CEO. Mr. Tucci, 68 years old, has considered giving up the CEO spot for several years and had previously said he and fellow directors might settle the succession question by February 2015.

VMware, in which EMC owns about 80%, will remain a publicly traded company. EMC holders will receive $24.05 a share in cash and in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. VMware has a market value of about $33 billion. Dell said EMC shareholders are expected to receive about 0.111 shares of new tracking stock for each EMC share. Shares of VMware closed at $78.65 Friday.

Michael de la Merced of The New York Times explained how the deal could benefit Dell:

No longer can a company like Dell thrive simply by making personal computers, the business that its founder began in his dorm room three decades ago. Mr. Dell recognized that when he and Silver Lake took the company private two years ago, with the goal of continuing to move toward corporate computing services away from the glare of the public stock markets.

Buying EMC would give Dell one of the biggest names in computer data storage, adding to existing offerings like network servers, corporate software and mobile devices.

“We’re continuing to evolve the company into the most relevant areas where I.T. is moving,” Mr. Dell said in an interview. “This deal just accelerates that.”

Under the terms of the deal, Dell will pay the equivalent of $33.15 a share in a complicated transaction involving both cash and a special kind of stock. That price is about 27 percent higher from where EMC’s shares were trading before news of the deal first emerged.

The takeover is an ambitious bet on a number of fronts. While the rapid pace of big mergers and acquisitions has not stopped, Dell, in buying EMC, would acquire a huge amount of debt. But that money would be borrowed before an expected rise in interest rates.

And it would mean making Dell even bigger at a time when companies of all stripes believe smaller is better. Many huge tech companies have announced plans to break themselves into their components, each devoted to a particular part of the market.

Brian Womack and Dina Bass of Bloomberg explained the risks associated with the deal:

For all its would-be benefits, the merger carries risks. The prevailing trend in technology is to separate and focus on fewer businesses to compete against nimbler competitors. Hewlett-Packard is splitting in two next month, a step that EBay Inc. took earlier this year. Though Dell and EMC have done business together for years and have complementary cultures, the sheer size of a combined entity could slow decision-making and hamper speedy product-development.

What’s more, EMC bonds came under pressure last week on concern that the purchase would undermine current bondholders’ place in the capital structure.

Arik Hesseldahl of Re/code explained how the deal contains a clause allowing EMC to offer itself to a higher bidder:

For a deal expected to be the largest tech deal of all time, it is telling that top executives at Dell, who would have normally been consulted ahead of the deal announcement were not informed of the talks. Many of them were traveling overseas when the news first leaked, sources briefed on the talks. The talks between the companies have been conducted directly between CEOs Michael Dell and EMC’s Joe Tucci, sources told Re/code.

The secretive nature of the talks hints at the fact that numerous terms had not been finalized as of late Sunday night. One of those terms, sources said, is a collar intended to protect both parties from movements in the value of EMC shares after the deal is announced.

The deal also contains a go-shop provision that will allow EMC to seek superior offers from other companies. That term is seen as window-dressing, as the only other realistic suitors for EMC — Hewlett-Packard, Oracle, Cisco Systems and IBM — are considered unlikely to bid.