Over the last couple of days there has been an ever-increasing rumble that Dell is going to make an offer for EMC. But how is this any different from the much-rumbled-about HP/EMC merger of last year?
At close of play yesterday, EMC was trading at $27.86 a share, and Dell is allegedly offering $30 a share, so a premium of just over $2 a share. Even so, this dramatically undervalues the group, considering the VMware side of the equation: it is currently trading at $78.65. (Remember, EMC owns 80% of VMware, with a market capitalization of a tad over $33 billion.) EMC’s market capitalization is currently $53 billion. For an understanding of what market capitalization is, have a read of “Definition of ‘Market Capitalization’.” This is not even adding the value of RSA, Pivotal, VCE, and Virtustream to the mix.
That is not just a BOGO (BOGOF) purchase: it’s buy one, get five for free. Good business if you can get it. I am beginning to understand Elliott Management’s issue regarding underperformance.
As interesting as it sounds, however, these are not the real questions. Instead, they are: “Can this deal actually happen?” and “Is it really worth it for both parties?” The simple answer to the first question is that if there is a will, then it will happen. People questioned the HP/Compaq merger at the time, but it happened, and HP was much the stronger for it.
The second question is the more interesting one. Is it worth it for both parties? It is easy to see the benefit to Dell. For a relatively small cost, it gets EMC2, Pivotal, Virtustream, VCE, and the crown jewels: VMware. I can hear you shouting, “$67 billion as small cost?” But when you consider the hidden value in the company, it is a snap; VMware alone is valued at $33 billion. Now, why is VMware the crown jewels? It is the only company in the Federation for which a real value can be easily calculated: it is a publicly traded company in its own right.
That said, what does interest me is that Michael Dell has publicly declared no interest in going public again since his spectacular stock buyback. A Dell purchase of EMC could deliver to Elliott the value it has been craving and also solve the Elliott problem that Tucci has been dealing with. Taking EMC private, and later returning VMware to a private-company status, makes sense. From the perspective of Dell, it will be able to innovate without the interference of profit-based, short-term thinking that the likes of Elliott Management show. What Dell has done since its re-privatization is impressive. What the EMC Federation does with its hands-off ownership model is also impressive.
This merger of two dinosaurs of the ’90s, if it comes off, will actually be compelling. It will allow them to reinvigorate their mutual and competing products. By rationalizing those divisions, think VNX, EqualLogic, and Compellent. The Dell stack will have access to all stacks from the desktop to the array via the network. It will also have access to VMware. This is arguably the more interesting part of a potential deal. Dell, unlike HP, has never really bought into the OpenStack/KVM world (Nutanix Acropolis notwithstanding) and is a natural VMware ally. The cloud plays that both VMware and Pivotal bring offer true synergy and value. Further, the technical team behind Virtustream is truly awesome and enterprise-based, with hardcore hooks into SAP HANA. From EMC’s perspective, it will remove a thorn in its side in the form of Elliott Management and could solve Joe Tucci’s replacement headaches.
Do I think it will happen? Never say never. There are still big questions regarding the scope of this deal. Reports have started to appear that EMC was only talking about the VNX part of the EMC2 division. If this is the case, then $30 a share is not good value. But if that is just a smoke-and-mirrors statement, Dell could well pull off the deal of the century so far.
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