The Dell-EMC merger hits some snags

Dell EMC merger loans stock price VMware
Credit: REUTERS/Bazuki Muhammad

Apparently $45 billion doesn't just grow on trees.

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Dell is finding it tougher than it imagined to raise the funding for its $67 billion acquisition of EMC, thanks to the credit markets and the stock market tanking in recent months.

The New York Post reports that Dell needs to raise $45 billion in order to finance the acquisition of storage giant EMC, and had hoped to price the first $10 billion of debt last Wednesday. However, the group of banks working on the deal, led by JPMorgan, said they needed another 10 days to arrange the loan.

The Post, citing an unnamed source, said tightening credit markets have made the loans harder to sell than expected.

And, wouldn't you know it, with the stock market tanking since this deal was announced last October, EMC is the one bright spot. While others are down 20%, 30% or more, including the once-invincible Apple, EMC is pretty much right where it was when the deal was announced; it was $28 in October and is at $25 now.

VMware, though, hasn't been so fortunate. It was at a high of $82 in October and is now trading at around $48. The transaction includes paying EMC shareholders $24.05 per share in cash, along with an unspecified amount of tracking stock in VMware. The last thing they banked on was VMware stock losing nearly half its value.

Last Friday, Dell Chief Integration Officer Rory Read (who did such a magnificent job at AMD) sent a letter to Dell shareholders on this issue. The letter was also recorded by the Securities and Exchange Commission, so it's public record.

"Between the date the merger agreement was entered into and the date of this proxy statement/prospectus, the market value of the VMware Class A common stock has declined, thereby reducing the implied value of the stock portion of the merger consideration," the letter said.

"Changes in the market value of the VMware Class A common stock also will impact the amount of cash that holders of EMC common stock will receive in the merger in lieu of fractional shares of Class V Common Stock," the letter continued.

To pay for the deal, Dell plans to sell its Perot Systems services business, which it bought for $3.9 billion in 2009. One of the leading candidates for Perot, France-based Atos, has dropped out of the bidding, according to the post. In recent days, Japan's NTT Data has stepped up as a potential buyer.

Selling Perot Systems is a real shame. Dell bought it to have a services arm so it could compete with IBM, which has basically become a services company that sells some hardware, and HP, which grabbed Ross Perot's first company, EDS. It was supposed to be a diversification maneuver, so as not to be totally reliant on hardware, and now it looks like Dell is reversing that. So either Dell is making a big mistake, or Perot Systems didn't quite pan out as they would have liked.

Today, Read sent another letter, this one to employees, addressing what he called "chatter" over "possible financing headwinds" with the deal. Read said "I can assure you any suggestions our debt financing is in jeopardy are off-target and do not reflect our financing terms and the progress of our financing to date. The debt financing is fully-committed and is being underwritten by many of the leading global banks."

Still, if they have to go through this much trouble, you have to wonder what kind of shape the company will be in once the deal is done.

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