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Dell buys out EMC in mega-super-duper $67 billion deal

Gentlemen! Start your garbage trucks!

EMC/Dell deal Dell has confirmed it is buying storage giant and virtualisation player EMC in a deal valued at $67bn, as we reported earlier today.

Privately-owned Dell is scooping up the publicly listed EMC in the industry’s biggest ever tech buyout.

The buyout breaks the record established by the $25bn Hewlett-Packard-Compaq deal in 2001.

The deal sees EMC shareholders getting $24.05 per share with extra for VMware. EMC shareholders will receive a total of $33.15 per share.

Dell is the tech name everyone knows, but also fronting this acquisition are venture capital firms Silver Lake and MSD Partners. The latter is Michael Dell’s own fund but it was Silver Lake that took Dell off the stock market for $25bn in 2013.

EMC will remain an independent, privately listed company, Dell said today, adding that the deal creates an enterprise solutions “powerhouse.”

“Our new company will be exceptionally well-positioned for growth in the most strategic areas of next generation IT including digital transformation, software-defined data center, converged infrastructure, hybrid cloud, mobile and security,” EMC chairman and CEO Joe Tucci said.

EMC is part of the so-called EMC Federation that includes: cloud pillar Vmware; VCE, the data centre and cloud venture started with Cisco; cloud software biz Pivotal; and RSA Security.

According to Tucci, it was necessary to create a “new company for a new era.”

“The waves of change we now see in our industry are unprecedented and, to navigate this change, we must create a new company for a new era,” he said.

What's Big Mickey D playing for here?

The deal is a massive gamble by Michael Dell, the PC maker’s CEO, on the continued growth and benefit to his firm of server-based storage sales. His chosen target, however, is curious.

The chatter is around “synergies”. Dell’s reasoning is it will sell servers to drill into the massive lake of data living on EMC’s servers by selling those customers new Dell kit.

EMC is the industry’s largest maker of external storage systems, enjoying nearly a third of worldwide revenue from that market sector. IBM, NetApp and HP are statistically tied on that front, with Dell a long way behind in fifth, taking just a 6.6 per cent share of the market.

But it’s Dell that actually dominates by storage capacity: it’s number one, with sales up 10 per cent year on year for server-based storage to $2.1bn, compared to Q2 of financial year 2014.

It’s difficult to see how Dell can squeeze growth from EMC as is: growth was just two per cent in EMC's recent, second quarter, to $5.98bn revenue. In tech enterprise parlance, that means “flat”.

EMC's full year results, as announced in January, were up five per cent to $24.4bn, but income was down six per cent to $2.7bn. Further, Dell will inherit a firm whose management has recognised the need for change, having already cut 1,500 jobs in the first quarter.

More layoffs were planned, with a target of making $850m in savings by 2017.

Nipping at EMC’s management’s heels has been activist shareholder Elliott Management, which had been pushing for a VMware spinoff to focus EMC and “return shareholder value.” A truce between EMC management and Elliott, agreed in January, expired last month, and Jesse Cohn, senior portfolio manager at Elliott, said: "Elliott strongly supports this deal."

What's happening next

You can bet the Silver Lake venture capital gods who took Dell private now believe it’s well within their power make the changes Elliott desired – and which EMC’s management had already planned. Except one can guess that these changes would only go deeper, forcing EMC into becoming a profitable province that Dell’s commodity server business can graze upon, having stripped out and re-arranged the structure they believe is holding back EMC.

For now, at least, VMware is going to EMC’s new owners – with Pivotal, RSA Security and VCE.

If Dell is dreaming of working a captive customer base, it needs to think again.

Sparc and one-time x86 rival Sun Microsystems entertained a similar vision when buying StorageTek for $4.1bn in 2005. Sun reasoned it could sell systems to the StorageTek base, who had previously bought IBM, HP, Dell and EMC.

But StorageTek customers weren’t buying – the firm averaged 0 per cent growth over five years but with $2.2bn in sales in the year before the Sun deal.

The theory didn’t pan out; StorageTek didn’t save Sun and this giant of Silicon Valley was sold to Oracle five years later.

Making Dell’s buy an even tougher bet is the fact that storage faces a new disruption in the shape of cloud, with Amazon rapidly establishing a firm beachhead inside companies as a provider of storage infrastructure, back-ups and data warehousing. ®

For full coverage of Dell's EMC buy, click here

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