Dell and EMC have agreed on the documentation to be put to the latter's shareholders at a forthcoming meeting that will vote on the merger of the two companies. And the document reveals that Dell plans to sell off some non-core businesses after the merger.
The document in question is a Form S-4, one of the many regulatory niceties EMC and Dell have to submit to the United States Securities and Exchange Commission (SEC) to make their planned merger a reality. As with many documents businesses are required to submit to the SEC, it's a warts-and-all affair designed to put on the record just about anything an investor might want to know and anything a company director needs known to avoid lawsuits. Which is why the main document is 341 pages long.
The document is bullish on the synergies that will flow from Dell and EMC merging. But it also points out that Dell will soon have US$59.1bn of debt, which will mean it won't be flush with cash for the next little while. The document says Denali Holding Inc (DHI), the company that owns Dell, “... has an objective of reducing its indebtedness in the first 18-24 months after completion of the merger and achieving an investment grade credit rating for such indebtedness. The cash necessary to achieve that objective is expected to come from divestitures of non-core businesses of the DHI Group, including EMC, cash flows from operations of the DHI Group and cash generated by reductions in the working capital needed to operate the DHI Group.”
Is that a buy-then-break-apart job? All parties to the transaction have said, long and loud, that there are mutual benefits to be had. It's unlikely all those statements are undone by this fragment of the S-4. But it does beg the question of just what will be non-core to Dell once it owns EMC? RSA's not going well. Dell's storage business might be surplus to requirements once it owns EMC. Dell's tried to offload its services business before. How might the Labs bit of Pivotal fit in the combined company? And what about various bits of EMC that don't fit well inside Dell Software. Or maybe Dell Software will be considered surplus.
Whatever's on Dell the man's mind, we won't know for ages!
The document also spends a lot of time on the fate of the “Class V” “tracking stock” that investors will score to compensate them for the 81 per cent of VMware that EMC currently owns. The Risk Factors section of the S-4 points out that tracking stocks are unusual and unpredictable.
“Because there is no established trading market or market price of Class V Common Stock, the value of the merger consideration that EMC shareholders will receive in the merger is uncertain,” the document says, later adding that “As a result of the characteristics of tracking stocks, tracking stocks often trade at a discount to the estimated value of the assets or businesses they are intended to track.”
Another section of the Risk Factors section is titled “There is a lack of certainty regarding the US federal income tax treatment of the merger and the Class V Common Stock.” Lots of legalese follows suggesting that Dell's legal counsel is probably right, but also pointing out that the United States Internal Revenue Service is yet to rule on the matter. If Dell's hoped-for tax treatment isn't approved, it's not a deal-breaker. But it is going to mean some messy and likely expensive re-arranging of the deal.
The document also foreshadows lots of renegotiation of Dell and EMC's many alliances, as partners feel new agreements are appropriate once they're dealing with a new company.
Dell also admits that it has a worrying dependency on its PC business, which generates 65 per cent of its net revenue and is challenged by low demand, longer refresh cycle and customer preference for lower-margin products or mobile devices Dell doesn't make. Here's an excerpt:
Other challenges include declining margins as demand for PC products shifts from higher-margin premium products to lower-cost and lower-margin products, particularly in emerging markets, and significant and increasing competition from efficient and low-cost manufacturers and from manufacturers of innovative and higher-margin PC products. For example, the built-to-order model that Dell has historically used is losing competitiveness in an environment where profit pools are moving toward lower-margin segments primarily based on a build-to-stock model, and Dell also lacks a strong offering in tablets.”
There's plenty more, including an admission that if Michael Dell were hit by a bus he'd be just-about-irreplacable, and lots of box-ticking about the threats posed by hacking, supply chain disruption, currency fluctuations and other eminently-unforeseeable events. The prurient can also find details of salary packages and shareholdings (Michael Dell's on $950,000 a year with the chance of two $2m bonuses).
If you make it through the full document and the merger goes pear-shaped, you can't say you weren't warned. ®