Is there anything that might work for Dell's acquisition of data storage giant EMC Corporation? At a time when the world is shifting towards cloud computing, how feasible is the acquisition of a data storage company? Not only this, but there are a lot of questions to be answered with regard to the mega-acquisition in the technology sector.
After going private in 2013, buying EMC is Dell's biggest deal so far, and also the biggest deal in the history of technology. Dell, yesterday, announced that it has purchased EMC in a deal worth $67 billion. While Michael Dell will be the CEO of the new company, the role of Joe Tucci, CEO and chairman of EMC, is not yet clear.
What is Dell getting?
With this acquisition, Dell now has access to a huge market in information storage and also virtualisation technology. EMC has companies like VMWare, Mozy, and RSA Security under its umbrella, and Dell will pay a significant premium for the company by issuing fresh common equity, debt financing, cash on hand as well as tracking stock.
Dell will get a controlling stake in VMWare, a cloud and virtualisation software and services provider.
Huge debt challenge
Business Insider reports that, "Dell is raising about $40 billion in debt financing to make this deal happen."
It further says, "HP CEO Meg Whitman told employees on the day of formal acquisition announcement that Dell is likely liable for $2.5 billion in interest alone on that debt every year." This means that the two companies are taking an additional debt of more than $45 billion. The Federal Reserve is scheduled to increase the interest rates and this will only make the situation more challenging for the two companies.
It is still unclear why Dell bought EMC at all when the chances that this deal could save either of the companies appear slim.
To acquire or not to acquire
Demand for EMC's high-capacity data storage systems took off with the ever-increasing internet and corporate networks. Business Insider reports, "In 1992, when then-CEO Michael Ruettgers took the reins, EMC booked revenues of $120 million." According to EMC's annual report, "Full-year 2014 revenue was $24.4 billion, an increase of 5 per cent year over year."
At a time when companies are splitting to take on the mushrooming technology start-ups, Dell must prove that why being an undoubtedly massive organisation would actually work out. Wired dubbed Dell and EMC amongst the "walking dead" of tech-based companies, while Fortune magazine compared the two companies to "two bricks trying to float."
Shallow growth forecasts for EMC
Analysts are skeptical about EMC's growth as they collectively opine that over the years, company's growth may get sluggish.
The company is facing acute pressure as the Information Technology (IT) industry is gradually moving its functions to the cloud. Moving over building and maintaining data centres, companies across the world are offloading multiple functions to data centres run by Google, Microsoft, Amazon and many more.
Amazon is one of the leaders in the cloud computing market, and it rose to this position because it cashed in on the opportunity before companies like EMC could.
EMC had cut its full-year revenue projection for 2015 by $400 million to $25.7 billion. Quoting imminent peril to EMC's business, analysts have been demoting its shares.
Dell's acquisition of EMC has certainly opened an array of opportunities and markets for the company. But with the hefty amount of cash, debt and interest involved in the deal, it would be interesting to see how Dell makes the most out of this bargain.