The Start of 2016 Brings the Start of Layoffs

Expect to see layoffs soon, now that the new year has built up some steam.

In my final post of last year, I mentioned that one of the stories from 2015 to keep an eye on in 2016 is the Dell $67 billion merger or acquisition of EMC. There has been some chatter that EMC, VMware, and Dell have been struggling to get the merger across the goal line. I have heard of a couple of different reasons for this struggle. One is the extra funding for the $10 billion or more in capital gains taxes that Dell would need to cover. These taxes were originally to be covered by a tracking stock. This tracking stock was structured under a fundamental provision of the US tax code and was designed to represent the holdings of Dell as the parent company.

Another thing to consider is the sheer amount of debt that Dell is taking on. It was just over two years ago that Dell agreed to go private in an almost $25 billion buyout of the company from the shareholders. Do the basic math of just adding the numbers from these deals together, and you get into the ballpark of around $100 billion dollars of added debt. These deals are very complex and are calculated using a variety of “creative financial solutions” to make them happen, but this simplistic addition should offer some perspective on the sheer amount of money that is involved.

One of the options available to help cut costs is to reduce the company’s workforce. As such, sources close to VMware have said that it will lay off up to around 900 people, or about five percent of VMware’s global head count. This reduction could start as soon as the end of January. It has also been reported that VMware’s parent company, EMC, which owns about eighty percent of VMware, has already started its own layoffs.

Speaking of VMware, it appears that the VMware investors are having some trouble coming on board with this deal. VMware is one of several EMC companies, including RSA, VCE, and Pivotal, that would also be included in this merger. As such, there are several VMware insiders who believe that with Dell’s acquisition of EMC, Dell will acquire VMware at a rock-bottom price, when one considers that VMware’s stock has been outperforming EMC. It is for this reason that many have come to believe that, in an attempt to lower some of the debt that Dell is shouldering, Dell might just consider selling VMware off at a profit. A number of VMware shareholders have been left with a sour taste in their mouth from the thought that VMware might be just an expendable pawn in this deal. Rumor has it that EMC and VMware have “gone back to drawing board” about some changes in the deal to pacify the VMware investors and get their support to close the deal. One of the changes in the deal was the reversal of the plan to move VMware’s public cloud vCloud Air business unit into EMC’s Virtustream unit.

Another recent change that can be attributed to the merger is EMCs decision to bring VCE back into EMC’s control. With that move, EMC has named the head of its global systems group, Chad Sakac, to replace Praveen Akkiraju as the VCE president. As a result of this move, it has been reported that layoffs have begun at VCE.

The stock market has not been doing very well since the start of the new year. If this downward motion is any indication of what lies ahead in 2016, a lot of companies may end up having some serious trouble reaching their expected revenue and profitability goals. If sales are declining, then the only other option available is to cut costs, and in doing so, cut the head count. Could this be just the beginning of even more layoff announcements from other companies? Considering that Walmart has announced the closing of over a hundred stores, indications are just not looking too good for the year ahead.

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