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Dell said to discuss buying EMC, VMWare stake in computing push

🕐 4 min read

Dell Inc. is in talks to combine with EMC Corp., people with knowledge of the matter said, in a deal that would help the companies cater to more customers and cope with a slowdown in demand for computers and storage equipment.

As part of the transaction, Dell would also acquire EMC’s controlling stake in VMware Inc., said two of the people, who asked not to be identified discussing private matters. The negotiations may not result in a deal, the people said.

EMC and Dell both need ways to manage a slump in their core businesses, with EMC weighing strategic options amid pressure from shareholder Elliott Management Corp. Though the combination would be costly and difficult to finance, it would create a computing colossus that combines EMC’s leadership in digital storage with Dell’s share of the market for servers, which help businesses tackle mammoth computing tasks.

“Would Dell be interested in EMC? Why not?” Joe Wittine, an analyst at Longbow Research, wrote in a research note. “From the perspective of the world’s largest PC company, a bigger enterprise portfolio is alluring, particularly one that has made the big bets on IT’s transformation ahead of time.”

The enlarged business could also gain access to VMware’s valuable software, which is used to more efficiently manage server-laden data centers. For EMC it would solve the longstanding challenge of finding a successor for CEO Joe Tucci, who was supposed to step down in February. EMC, which has acknowledged it needs to take steps to boost shareholder value, held merger talks with Hewlett-Packard Co. last year, people familiar with the matter said at the time.

One of the biggest hurdles is how Dell would finance the acquisition. Taken private in a $23 billion transaction in 2013, Dell has about $12 billion in debt, according to analysts. EMC’s market capitalization is about $51.8 billion, reflecting the VMware stake.

Dell would require about $40 billion in financing, CNBC reported, without disclosing the source of the information. It’s weighing an offer of about $27 a share, CNBC reported.

Pressure on EMC has emanated from Elliott, which succeeded in adding two members to EMC’s board in a standstill agreement that barred public criticism of EMC until it ended in September. EMC shares had declined 13 percent this year through Wednesday, leaving it with a market value of about $50 billion. Dell was taken private in a deal worth about $25 billion in 2013.

Dave Farmer, a spokesman for Hopkinton, Massachusetts-based EMC, and Frank Smith, a spokesman for Round Rock, Texas-based Dell, declined to comment.

For Dell, a combination with EMC could bolster its storage revenue as it competes against Hewlett-Packard and other rivals. It’s also facing competition from cloud-computing providers such as Amazon.com and Google. At the same time, Dell is facing a sagging personal-computer demand. Global PC shipments fell 9.5 percent in the second quarter, hurt by restrained corporate technology spending and the strength of the U.S. dollar, market researcher Gartner Inc. said in July.

EMC is facing a waning market for its older, pricey storage models. While the company has been focusing on newer products such as flash arrays that speed up data retrieval, where it’s growing more rapidly, that hasn’t been enough to lift sales growth. EMC’s revenue is projected to expand 3 percent this year, the slowest rate of growth since a decline in 2009, according to data compiled by Bloomberg.

Tucci has announced plans to retire before — February was the most recent deadline that’s come and gone — and has said the company is looking at internal candidates. While a deal could answer the succession question and give EMC shareholders a payoff, some analysts questioned the logic, with Daniel Ives at FBR Capital Markets calling it a “major head scratcher.”

“It would be a very financially complex merger, high integration issues, and fundamentally would combine two very mature companies into one,” Ives said. “Of all the options potentially on the table for Joe Tucci and EMC, this would be not ideal in the eyes of the Street. It would add more maturity to an already elderly EMC.”

This isn’t the first time Dell has considered a combination with EMC. Former Dell CEO Kevin Rollins tried to convince then- Chairman Michael Dell to agree to such a deal in the last decade but Dell declined, Rollins has said.

Still, EMC must do something, said Ives.

“EMC is getting major heat from activist shareholder Elliott to make a move in the next few weeks, otherwise a proxy battle could be in store,” Ives said. “Coupled with current CEO Tucci on the edge of retirement, the clock is about to strike 12 and EMC needs to make a move after years of the status quo.”

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