7 October, 2015 /Woori BMO Group/ According to analysts at wealth management company Woori BMO Group, Dell Inc. and private equity firm Silver Lake are in advanced talks to buy EMC Corp., a deal which would rank as the largest technology-industry takeover ever and remove questions about EMC that have been hanging over the data storage company for over a year.
An EMC agreement could be signed within a week, though according to some people, it is also likely that one will not be achieved. The transaction now under negotiation calls on the sellers to break off some of VMware Inc. from EMC. VMW unit -0.60 per cent. Since The Wall Street Journal revealed it conducted a strategic review last year, EMC has been exploring many options, but this now seems to be the most likely outcome.
EMC shares rose 4.8 per cent in midday trading Thursday after the Journal reported about the possible deal. EMC has a $50 billion market capitalization, and a merger is expected to be priced at around that point, the individual said. Avago technology chip maker Ltd. AVGO’s 0.44 per cent pending $37 billion deal to purchase Broadcom Corp. is currently the largest pure-tech takeover ever made.
Woori BMO Group’s Director of Institutional Equity, Andrew Williams, said: “There has been a huge wave of tech and other takeovers this year, and the overall merger volume is running at a near-record pace.”
EMC has been under pressure to boost its stock price since last year when activist hedge fund Elliott Management Corp. took about 2 per cent of the company’s stake and urged VMware to spin out. EMC holds 80 per cent of VMware, which has a $34 billion market value. A deal between Elliott and Hopkinton, Mass.-based EMC, which had prevented the firm from actively threatening EMC, terminated in January last month. Elliott has remained quiet since.
Analysts also said it would make sense for Dell to purchase the sizeable data-storage business of EMC, which was made private in a historically leveraged buyout in 2013.
Dell went private by its founder, Michael Dell, and private equity firm Silver Lake in a roughly $25 billion buyout. It has pivoted from the public spotlight to more profitable areas such as storage and security from personal computers facing headwinds from tablet computers and smartphones.
Christian Harper, Woori BMO Group’s Director of EMEA Wealth Management, said: “A contract with EMC will consolidate Dell’s transition from a consumer-facing business to a technology-focused one for large companies which is a far cry from the organization Mr Dell created in his 1984 dormitory at the University of Texas.”
According to FactSet, Dell still bears more than 11.7 billion dollars in debt. It wasn’t immediately clear how it would fund a possible EMC purchase.
EMC is announcing its quarterly earnings on Oct. 21, and some investors have speculated the firm would have to declare a merger or face a proxy fight until then. The merger or other major deal for EMC could also address another problem that is hovering over the company: the fate of its CEO, Joe Tucci. Mr Tucci suggested that he might retire at the start of the year, although no succession plan has been confirmed to date.
EMC had talks with Dell in September 2014, the Journal reported. EMC was also negotiating a merger with Hewlett-Packard Co., HPQ 2.76 per cent, which concluded in October 2014 when H-P announced plans to break into two.
Previously, EMC was a synonym for data storage. The firm was a tech boom lover — its shares were one of the best performers in the S&P 500 in the 1990s — but since then it has fallen on more challenging times. This year, the shares have fallen 13 per cent and are a little different from when Elliott began his campaign. The company reported a 17 per cent decline in quarterly profit in July and reduced its forecast for the full year.
Storage was a drain on earnings, a change attributed by EMC executive David Goulden to a “secular transition to the new digital age characterized by web, mobile, social and big data” at the company’s most recent quarterly conference call. EMC’s storage division’s revenue growth decreased from a 16 per cent increase between 2010 and 2011 to a 2 per cent gain between 2013 and 2014, according to regulatory filings. It competes with NetApp Inc., Hewlett-Packard, and International Business Machines Corp. among others. A new competitor, Pure Energy, made its debut public on Wednesday, down 5 per cent.
EMC also owns Pivotal software development company and RSA provider for network security. The divisions are run as separate businesses under what Elliott has described as a so-called federation system. It is not clear which could be included by Dell in an EMC buyout if any.
A merger could be a success for Elliott, who has become one of the biggest technology companies-focused activist investors. It has launched campaigns and won at least partial wins at organizations including Informatica and Citrix Systems Inc. after announcing its interest in the EMC in July 2014.