Why Dell bought EMC in landmark multi billion pound tech deal: Is EMC is the perfect fit for Dell?

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ComputerworldUK looks at the the history between PC manufacturer Dell and storage vendor EMC following their landmark merger announcement this morning. Here is why Dell bought EMC.

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VMware, HP, Dell, Cisco and Oracle have been eyeing up the data centre storage vendor in recent years, but now it is confirmed that Dell will merge with EMC in a landmark tech deal costing $67 billion (£43 billion).

Speculation over which company would eventually buy EMC has been ongoing for several years now, as more-and-more corporations outline mergers and acquisitions as a core growth strategy.

Dell was allegedly considering EMC this time last year, when HP decided not to bid for the storage company and split itself into two separate entities instead.

Today's announcement follows a long history between companies. It will create "the world’s largest privately-controlled, integrated technology company," a spokesperson for Dell said in a statement.

Why Dell bought EMC: Why is this surprising?

Dell has always had an eye on enterprise IT services. Back in 2011, Dell’s Travis Vigil, then executive director of product marketing for enterprise storage, said EMC was a likely a target for acquisition.

"Eight enterprise acquisitions in the last year. We've publically said acquisitions are part of our growth strategy and the focus has and will continue to be in the enterprise space,” he said.

But the acquisition is surprising when you consider both company’s history. Dell and EMC had a ten-year reseller partnership that ended in 2013, when Dell bought SAN vendor EqualLogic and high-end SAN vendor Compellent, causing competitive conflicts.

The rift became more apparent when EMC launched a range of VNX arrays - and EMC’s Joe Tucci publicly announced that Dell would categorically not re-sell any of the line.

Political issues aside, the notion of becoming a one-stop-IT-shop is at odds with other large players’ strategy. Notably HP, who is trying to filter its products and services as well as IBM who is de-aggregating its massive estate.

Why Dell bought EMC: What is EMC worth?

On Friday’s market close, EMC was valued at an estimated $53 billion (£32 billion). The storage vendor’s share prices have been in decline and it has tasked with a turnaround plan, urged by billion dollar hedge fund, Elliott Management.

The bulk of EMC’s $50 billion (£32 billion) lies in its 80 percent stake in virtualisation vendor VMware. Before reports of the sale were published, its shares had fallen more than 12 percent. EMC has been under pressure to deliver more value for its shareholders for some time, and has been in talks with a variety of companies, including HP about a proposed merger. The printer company decided to split itself in two instead.

Why Dell bought EMC: Can Dell afford it?

As a private company, it is difficult to evaluate the cash Dell had to hand to complete the agreement. 

In 2013, just before it went private, Dell’s market capitalisation was valued at around $21 billion (£14 billion), according to Sterne Agee financial analyst Shaw Wu. It has since had three years of private equity to assist with its restructuring goals - moving from low margin PC products to a high priced brand as well as attaining a stack of services, software, networking and storage.

In a statement this morning, Dell's spokeperson said that the transaction will be financed "through a combination of new common equity from Michael S. Dell, MSD Partners, Silver Lake and Temasek, the issuance of tracking stock, as well as new debt financing and cash on hand.

"Mr. Dell and related stockholders will own approximately 70 percent of the company’s common equity, excluding the tracking stock, similar to their pre-transaction ownership."

it was speculated, in the New York Times, that Dell might spin off the VMWare stake to alleviate the debt it will have to take on with the merger. However Dell has reiterated that VMware will remain a publicly-traded company.

"This transaction is expected to accelerate VMware’s growth across all of its businesses through significant synergies with Dell’s solutions and go-to-market channels. VMware remains committed to investing in and partnering with its strong, industry ecosystem," its spokesperson added.

Why Dell bought EMC: Analyst view

The deal may be the largest in technology history, but it is certain to raise a few eyebrows. “This is all just another sign of panic among ‘old guard’ IT players trying to make sense of ‘new world’ IT. Bulking up with other old guard players is really not the right answer,” says Anthony Miller, analyst at TechMarketView.

Why Dell bought EMC: Other suitors

It’s worth noting that there was talk that VMware would buy out its parent a few months ago. Prior to that, HP, Cisco and Oracle were said to be considering EMC too. But Oracle since bought Sun storage vendor. Cisco, however, was well placed to benefit from an EMC bid.

It has already partnered with the storage vendor to develop pre-packaged datacentre pods, or “Vblocks” containing Cisco’s networking technology, VMware’s hypervisors and EMC’s storage arrays. It also had a joint service venture, Virtual Computing Environment to complement the pods.

EMC's merger with Dell is expected to close between May and October 2016. 

Read: Dell and EMC merge: the largest tech merger ever

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