SAN JOSE, Calif. – Dell bid $67 billion to buy storage giant EMC. The deal, billed as the largest high tech acquisition to date, is so far getting mixed reviews.
The move comes as PC sales which still make up the majority of Dell’s revenues, are slumping. Market watchers recently reported the PC sector declined 7-10% in the third quarter.
Dell’s historic rivals Hewlett-Packard and IBM are both slimming down under the market pressures. HP announced a year ago it will officially split next month into separate PC/printer to server groups. IBM sold off its semiconductor operations to Globalfoundries earlier this year after previously selling off its x86 PC and server businesses to China’s Lenovo.
Founder and chief executive Michael Dell said the EMC deal will create a company posed for growth in expanding markets such as cloud computing and security. EMC brings a generally flat business in big storage arrays which can bolster Dell’s access to large customers. EMC earlier acquired security specialist RSA and has a controlling interest in VMWare, a leader in the trend to server virtualization.
EMC reported declines in product revenues and overall profits in its latest quarterly report, although revenues related to services were up. One financial analyst, quoted in the Wall Street Journal, estimated the combined companies would have relatively low 35% gross margins and limited room for savings from cuts given little product overlap.
The year already has set records for the size of acquisitions in the maturing semiconductor sector. In the first half of the year, chip companies announced more than $72 billion in M&A deals, six times the average, according to market watcher IC Insights.
The Dell/EMC deal is in some ways a throwback to a prior era. Over the last decade Dell, HP, IBM and Oracle all bulked up on networking, storage and services acquisitions to expand beyond PCs and servers.
Compared to its rivals, Dell has tended to serve small-, and medium-sized companies. The EMC deal will give it a bigger foothold with larger customers.
The deal will be financed through a complex combination of equity, debt and cash, said a Reuters report. The funds include new equity from Michael Dell’s own investment company as well as Singapore state-owned investor Temasek Holdings and private-equity firm Silver Lake Partners that helped take Dell private in 2013.
EMC's board has approved the merger, but its shareholders have yet to vote on the deal. The agreement gives EMC 60 days to solicit competing bids, something not generally expected to upset the Dell bid, according to the Reuters report.
“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 said Joe Tucci, EMC’s chairman and chief executive in a press release. “The combination of EMC and Dell will prove to be a winning combination for our customers, employees, partners and shareholders,” he said.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times