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Dell Buys EMC Creating Winners and Losers

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After a weekend of rumors Dell and EMC announced early Monday morning that Dell, with more than a little help from their friends at Silver Lake Partners, will acquire EMC for the princely sum of $67.1 billion dollars.  The deal is scheduled to close sometime before the end of October 2016. As in any big deal there are winners and losers let’s take a look at the deal and figure out who they are.

Before we move on to the winners and losers let’s examine the deal itself.  Dell has proposed paying a total of $33.15 for each EMC share a roughly 28% premium over EMC’s price Friday.  That $33.15 is made up of $24.05 per share in cash (a total of ~$49B) plus $9.10 per share in the form of a VMware tracking stock (worth a total of ~$18B).

That tracking stock accounts for about half of EMC’s 80% ownership in VMware but since these tracking share don’t have any voting power Dell will retain control of VMware while owning only about 40% of the stock. EMC has 60 days to find a better offer but I don’t see another offer coming.

Of course Dell and EMC also have some history. Back in the early 2000s Dell sold 30-40% of EMC’s Clariion arrays. Many of those deals however were at very low margin with EMC pushing deals down to Dell when they didn’t meet EMC’s profitability or credit targets. Dell bought Equallogic and Compellent so they could start making money on the storage they sold. Now that they own EMC they should be able to make a buck.

The first and hopefully biggest winner is Michael Dell. I’ve long believed that his great ambition was to turn the PC company he started in his University of Texas dorm room into Thomas Watson, Jr’s IBM, a full service soup to nuts IT supplier. With EMC Dell now has a market leading storage, and security, portfolio to go with their PCs and servers.

If nothing else this deal disproves the comments I heard from many industry followers in 2013 when Sliver Lake helped Michael take Dell private that a private Dell Computer would be unable to make the acquisitions required to compete in the IT infrastructure market.

Much as I hate to give those leaches any credit at all I have to call Elliott Management in the winners’ column as well.  Elliott, for those who haven’t been watching the tech scene, buys 8% or so of a company’s stock and then starts demanding that management do something, in the case of EMC it was spin off VMware, to “unlock shareholder value”. That results in a stock bump and Elliott sells on the short term gain leaving a crippled company and the shareholders that didn’t sell with them have their value unlocked as the stock later tanks.

Then there’s the Wall Street bankers.  Dell has to borrow around $50 billion to pull off this deal and that means the house of Morgan and other Wall Street folks walk away with what Business Insider estimates at $710 million in fees.

The big winner is however Joe Tucci. Not only does he get to retire without having to disassemble the EMC federation he spent the last decade building by selling off VMware but since he, and other EMC senior execs have “change of control” clauses in their contracts Tucci gets $39 million in additional compensation including $8.7 million in cash and $30.3 million in accelerated equity awards. Other EMC execs including David Goulden,  Howard Elias and Jeremy Burton get another $108 million or so in payouts. Since Dell will want to keep at least some of these guys around for at least part of the transition they’ll also get to negotiate new employment contracts with retention bonuses.

The EMC team also gets to run the new Dell Enterprise group, which will also include Dell’s storage and server groups from Hopkinton. Dell’s PC and consumer businesses will continue to run out of Austin.

The losers are of course the employees that will inevitably be laid off, and the customers who’ve invested in the technologies, mostly from the Dell side, that get killed off or turned into cash cows to be milked not pet dogs that are loved by poppa.

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