Analysis: Dell To Buy EMC For $67 Billion

The news is everywhere, and has been for days: [entity display=”Dell” type=”organization” subtype=”company” active=”true” activated=”true” deactivated=”false” key=”dell” natural_id=”fred/company/1260″]Dell[/entity] and [entity display=”EMC” type=”organization” subtype=”company” active=”true” activated=”true” deactivated=”false” key=”emc” ticker=”EMC” exchange=”NYSE” natural_id=”fred/company/1441″]EMC[/entity] have announced that [entity display=”Dell” type=”organization” subtype=”company” active=”false” key=”dell” natural_id=”fred/company/1260″]Dell[/entity] plans to purchase [entity display=”EMC” type=”organization” subtype=”company” active=”false” key=”emc” ticker=”EMC” exchange=”NYSE” natural_id=”fred/company/1441″]EMC[/entity] in a deal worth approximately $67 billion. The transaction would result in the majority of [entity display=”EMC's” type=”organization” subtype=”company” active=”false” key=”emc” ticker=”EMC” exchange=”NYSE” natural_id=”fred/company/1441″]EMC’s[/entity] famous Federation structure going private, with only [entity display=”VMware” type=”organization” subtype=”company” active=”true” activated=”true” deactivated=”false” key=”vmware” ticker=”VMW” exchange=”NYSE” natural_id=”fred/company/5897″]VMware[/entity] maintaining a small presence on public markets. This is the same public stake that [entity display=”VMware” type=”organization” subtype=”company” active=”false” key=”vmware” ticker=”VMW” exchange=”NYSE” natural_id=”fred/company/5897″]VMware[/entity] currently trades as.

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Dell has been talking about cloud for some time. (Photo: Justin Warren)

Background

The implications and details of this deal are legion, and there is a wealth of detail out there, good and bad, so I’ll point you at the commentary I think is most worth bothering with rather than re-hash the same stuff here. My thoughts will follow. Do read these things, because it’ll give you the background to deal with what I talk about here.

The Federation Is Dead

Ignore commentary to the contrary. [entity display=”Dell” type=”organization” subtype=”company” active=”false” key=”dell” natural_id=”fred/company/1260″]Dell[/entity] is not a federated entity, and this is a takeover, not a merger. The federation structure didn’t work out and honestly it’s not that surprising why: [entity display=”EMC” type=”organization” subtype=”company” active=”false” key=”emc” ticker=”EMC” exchange=”NYSE” natural_id=”fred/company/1441″]EMC[/entity] group doesn’t really add any value to the component companies beyond what they could do by themselves. How do they become more valuable by being owned in a Federation? Cost of capital? [entity display=”EMC” type=”organization” subtype=”company” active=”false” key=”emc” ticker=”EMC” exchange=”NYSE” natural_id=”fred/company/1441″]EMC[/entity] is not [entity display=”Berkshire Hathaway” type=”organization” subtype=”company” active=”true” activated=”true” deactivated=”false” key=”berkshire-hathaway” ticker=”BRK.B” exchange=”NYSE” natural_id=”fred/company/595″]Berkshire Hathaway[/entity].

This is Tucci’s swan song. He gets to sell his pride and joy to someone he likes, rather than having it broken up and sold for scrap because of activist investors. The structure will be preserved temporarily as a fig leaf to cover Tucci’s embarrassment for having to bow out in this fashion.

Note the repetition of the word ‘synergies’. Synergies is a word trotted out to provide post facto justification for whatever the executives wants to do, and they are highly dependent on the assumptions used to calculate them. You don’t get synergies by keeping things separated, so there will be consolidation. The talk is of revenue synergies of three times the cost synergies, which implies cross-selling versus cost-cutting, but there will be plenty of both.

All [entity display=”Dell” type=”organization” subtype=”company” active=”false” key=”dell” natural_id=”fred/company/1260″]Dell[/entity], All The Time

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