The Dell and EMC Corp. deal announced yesterday (Monday) is the largest technology deal ever.
Dell Inc. and private equity firm Silver Lake will buy the cloud computing and data storage company EMC Corp. (NYSE: EMC) for $67 billion.
There are a lot of numbers to report when one company buys another. Here are the ones that matter:
- The Dell and EMC deal, at $67 billion, is $30.5 billion more than the next biggest tech deal. Vago Technologies Ltd. agreed to acquire Broadcom Corp. for $36.5 billion in May 2015.
- Dell will offer EMC stockholders $24.05 a share in cash and $9.10 of a tracking stock tied to EMC's VMware Inc. (NYSE: VMW) stake, according to USA Today. That's a total of $33.15 per share.
- In terms of revenue, the acquisition of EMC now places Dell directly behind Hewlett-Packard Co. (NYSE: HPQ) and International Business Machines Corp. (NYSE: IBM). Analyst James Kisner estimates that the combined revenue of Dell and EMC will be between $74 billion and $76.5 billion. HP and IBM reported net revenue of $111.5 billion and $92.8 billion, respectively, in 2014.
- EMC stock rose 1.8% yesterday. It's up more than 12% since the deal was rumored to be happening last week.
The Dell and EMC deal provides Dell an additional source of revenue. But what does the purchase of EMC mean for Dell in the long term - and is it good for EMC stock?
Why Dell Bought EMC Corp. (NYSE: EMC)
Dell went private in 2013.
Founder Michael Dell wrote an op-ed piece in The Wall Street Journal last year. He felt that the move to privatize has benefited the computer technology company. "Privatization has unleashed the passion of our team members who have the freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street."
The pressure from Wall Street may be gone, but Dell still faces challenges within the industry...
Dell lives off its PC sales - which is incredibly troubling when you look at where those are headed. Online tech magazine DailyTech reported PC sales dropped 2.1% globally in 2014. Sales were down 10% in 2013.
So the computer technology company needs to enter the growing data storage market if it wants to increase revenue and profit.
Dell doesn't provide its sales numbers because it is private. Goldman Sachs estimates that Dell posts $56 billion in annual revenue.
Research site MarketsandMarkets estimates that the cloud storage market could be worth $65.41 billion by 2020.
EMC provides Dell access to this growing market without overhauling its existing infrastructure. Dell has its own cloud computing offerings, but not to the level of EMC.
Now Dell can create a one stop shop for PCs, servers, software, and storage.
There was also this key prize for Dell in its purchase of EMC...
Dell and EMC Deal Comes with Valuable VMware Inc. (NYSE: VMW)
EMC owns 80% of VMware, which provides virtualization infrastructure solutions in the United States and internationally. The company offers a variation on the client/server computing model, sometimes referred to as server-based computing.
VMware was what Dell was really after.
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VMware's revenue has increased year over year since 2012. Total revenue climbed 24.11% between 2012 and 2014.
VMware boasts on its website that 100% of Fortune 100 companies trust VMware as their virtualization infrastructure platform.
Can Investors Profit from the Dell and EMC Deal?
EMC shareholders still need to approve of the deal. The VMW stock plunged 10.60% late Monday morning to $70.31 after the announcement that Dell purchased EMC.
Technically another bidder could emerge. Because of a "go-shop" provision in the Dell and EMC merger agreement, EMC has 60 days to solicit bids from other parties. EMC would pay Dell a discounted breakup fee if EMC inks a deal with another company.
Potential suiters include International Business Machines Corp. (NYSE: IBM), Cisco Systems Inc. (Nasdaq: CSCO), and Hewlett-Packard Co. (NYSE: HPQ). Still, people familiar with the matter told Reuters the chances of EMC challenging Dell with a competing offer is slim.
For investors looking to make a hefty profit from EMC stock, Money Morning Defense & Tech Specialist Michael A. Robinson says the time has passed.
"It's probably too late to get in now on speculation of a buyout," Robinson said Friday. "I don't chase stocks like that, especially in a market as volatile as this."
"I would caution anyone against buying into buyouts, especially when the news has been out for several days," Robinson continued. "I would avoid it unless you are an experienced, aggressive trader and you really know what you're dealing with. Any new rumor could send the stock in any direction. This is not a great strategy for long-term investors."
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