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January 29, 2018
martinwolf  Transaction Analysis
CNBC: Dell Considering Reverse-Merger with VMware in What Could Be the Biggest Deal in Tech Industry

Financial Information*
  • Not Disclosed
Transaction Facts
  • CNBC reported today that Dell Technologies, the world's largest privately held technology company, is considering a reverse-merger with VMware (NYSE: VMW), the ~$60B cloud computing company it has an 80 percent stake in .  
  • The reverse-merger would be the biggest deal in tech industry history.
  • Though Dell has not responded, the board of directors is scheduled to meet later this month regarding the company's future.
  • While VMware shares touched an all-time high on Thursday, shares dropped 16.63% percent, the steepest decline in two years, today as shareholders reacted negatively to the combination.
Finding the Right Fit 
  • Moving Forward: The deal would allow Dell to be traded publicly without having to go through an IPO. VMware would issue shares to Michael Dell and Silver Lake Partners, the owners of Dell (Michael Dell and Silver Lake took Dell private in 2013 in a transaction worth $24.4B). The owners could then sell shares on the public market as a way of monetizing their investment. 
  • Adapting to Change: The deal could also mitigate its $52.5B debt pile from buying storage-technology provider EMC for $67B in 2016, when Dell also purchased its majority stake in VMware. 
  • More Pressure: In retrospect, the EMC acquisition failed to deliver the cost savings and performance as projected. Increasing component costs and a challenging data storage market have eroded the company's margins, especially as AWS and Azure wage war with prices. The PC market has meanwhile remained stagnant. 
  • Managing Expenses: While  Dell's server business is growing (the unit helped its total net revenue grow to $56.7B in the nine months to Nov. 3 from $41.6B a year before), the company's operating expenses have been hefty. Operating expenses rose to $17.3B from $10B a year ago, resulting in an operating loss of $3B -- up from a $1.6B operating loss a year ago.
  • Tax and Interest: There is perhaps an even more compelling reason than the ones listed above: tax reform. Dell's debt pile is expected to become even more burdensome in 2018 as the new tax plan caps a company's ability to deduct interest expense to 30 percent of its annual earnings before EBITDA. The company also pays ~$2B annually for interest payments. 
For more information about this transaction,  click here to read the report.

martinwolf was not the advisor in this transaction.

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With offices in the San Francisco Bay Area and New York, martinwolf is a leading M&A Advisory focused on middle market companies in the IT Services, IT Supply Chain, IT-Enabled Business Process Outsourcing and Software as a Service (SaaS) space. Since 1997, our team has completed more than 150 transactions in over 20 countries and sold seven divisions of Fortune 500 companies. 

 

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