Dell made waves earlier this month, announcing it planned to acquire EMC (NYSE: EMC) for $67 billion. If it stands, it will be the largest tech acquisition of all time -- but will we look back in a few years and say it was money well spent?
A full transcript follows the video.
Sean O'Reilly: Dude, you're getting a $67 billion buyout offer, on this tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Friday, Oct. 16, 2015. With me today is the always stylish Dylan Lewis. How's it going today, Dylan?
Dylan Lewis: Pretty good.
O'Reilly: You, of course, remember the old Dell commercials.
Lewis: Yes.
O'Reilly: "Dude, you're getting a Dell."
Lewis: We were saying they ought to bring them back.
O'Reilly: Oh, they definitely need to. Although he's probably 40 now.
Lewis: That would be a cool call back. To see them and his kids hanging out.
O'Reilly: Yeah, that would be amazing. Then he gives them a Dell laptop and everything. I guess, long story short, apparently Michael Dell woke up one morning and decided he needed to write a $67 billion check. That's a lot of zeroes. Before we dive in, what exactly is he buying?
Lewis: This is one of the biggest ...
O'Reilly: The biggest!
Lewis: Yeah. If it goes through, it's the biggest tech deal of all time. Dell announced Monday that they've agreed to buy EMC, which is a corporate software storage security giant.
O'Reilly: Was it founded by Albert Einstein?
Lewis: No. Fun shout out to my alma mater. The founders were Egan and Marino, both Northeastern University grads in Boston.
O'Reilly: Unbelievable. It is a throwback to E=MC squared, right?
Lewis: Yes.
O'Reilly: OK.
Lewis: This is another interesting development in what we've seen over the last couple of years with Dell. If you remember about two years ago they had this highly levered LBO to take the company private. It's another weird thing to watch for, and we're going to try to make sense of it here for the listeners.
O'Reilly: Sixty-seven billion dollars happens to be the GDP of Myanmar. Why is Michael Dell spending the GDP equivalent of Myanmar on a cloud storage software company?
Lewis: With the transition to going private, I think one of the other things we've seen Dell do in the last couple years is pivot from being a personal-computing company where you're working primarily toward customers like you and I, and more toward enterprise IT solutions. You're seeing them emphasize ...
O'Reilly: Supposedly since the buyback and pivot, they're rocking it. Michael Dell says, "We've never been better. We're making tons of money." The fact that they're about to spend $67 billion seems to hint that they have been somewhat successful. I'm suspicious.
Lewis: That's one of the frustrations of their being private. You have very little insight into what's going on. I think that's one of the things that Michael Dell has emphasized in all the announcements for this. He said that being private grants them all that flexibility and removes the level of scrutiny that you have as a publicly traded company.
O'Reilly: He constantly complained about dealing with the quarterly short-term mentality of Wall Street.
Lewis: Yeah. EMC now escapes that scrutiny.
O'Reilly: Oh, boy!
Lewis: Yeah, but I think by and large, this is really two companies that have struggled a little bit in recent years. Hopefully, setting up a one-stop-shop type option for corporate IT. One of the problems that Dell has run into and EMC has run into quite a bit recently, is all these corporate clients that were willing to set up their own data-storage centers and have all the solutions to support them in the past are now instead spending their dollars on cloud service options from [Amazon.com (AMZN +2.02%), Alphabet's(GOOG 0.20%) (GOOGL 0.41%) Google], Microsoft (MSFT 0.60%), etc.
This whole segment of the market has changed. Dell and EMC can pivot toward it, but I think the idea of their working together and giving them a full suite option to people who are interested in hosting their own stuff and managing it on their own is very compelling. I think that's one of the main motivations here.
O'Reilly: We'll get into this later, but I almost feel like EMC is getting the better part of this deal.
Lewis: Yeah. It remains to be seen. One of the things, anytime you hear "biggest acquisition" or "biggest proposed acquisition," how does this stack up to what we've seen in the past?
O'Reilly: Funny you should ask. I did look up the biggest tech deals of all time. I'm not going to read through the whole list. Listeners can Google "biggest tech deals of all time" and you'll be able to find it. The 10th biggest was just $7.9 billion, and that was Oracle (ORCL +0.17%), acquiring BEA Systems in January 2008. This was actually one of the best deals on this list.
They got their WebLogic Software that still powers their Fusion Middleware product -- I've never heard of it; I'm sure you haven't, either -- but it's still in their suite of offerings. On the other end of the spectrum you have stuff like ones we're all aware of, like Compaq's acquisition by [Hewlett-Packard (HPQ 0.65%)]. That was actually No. 3 on our list; the third biggest acquisition. That was $19 billion back in 2002.
Lewis: That did not turn out too well.
O'Reilly: I'm just going to say it: It's the worst one on here. Thirty thousand people lost their jobs in the wake of it. This is not pretty. And kind of middle of the road, but still not a great acquisition, was Compaq's buying Digital Equipment for just under $10 billion in 1998. That turned out to be terrible. Symantec's (SYMC 2.61%) acquisition of Veritas, terrible deal. They actually had to sell Veritas a few years later -- that summer -- for $2 million less than they paid, years later.
Lewis: That's quite a writedown.
O'Reilly: That's a $2 million writedown. They were like, "We can't make this work." This acquisition, I'm not saying it will be bad because over the last few years, Michael Dell has supposedly proved himself and his ability to run a private tech company. This seems more like Compaq buying Digital Equipment, the Symantec deal I just mentioned, or even HP's $13.9 billion acquisition of Ross Perot's Electronic Data Systems.
That hasn't worked out well. The company has suffered major layoffs ever since. You're talking about how companies have all these options for storing all their data. I don't know. Making it a one-stop shop seems to be what everybody attempts on this list and, at best, with mixed results.
Lewis: OK. Aside from where tech is going, just looking at the scale of the merger itself and the size of the deal, I think it can be really hard to make the numbers work. I think that's something that's plagued a lot of these M&As on this list.
O'Reilly: The biggest one was No. 2: JDS Uniphase spending $41 billion on E-Tek, which was back in July 2000. Fifteen years have gone by and they're spending $26 billion more.
Lewis: With this deal I haven't seen a lot in terms of cost cutting, or synergies.
O'Reilly: Has that even been mentioned?
Lewis: I haven't seen much on it, and those are the buzzwords that you're like, "You might be able to realize savings of $X amount." And you can factor that in. This is much more of a product offering type of thing, it seems.
O'Reilly: Did you hear what Meg Whitman, the CEO of HP, said about this?
Lewis: No.
O'Reilly: She was addressing all of her employees and was talking about -- this was making fun of them or something -- saying, "They're going to have to spend $2.5 billion a year on interest to make this happen." I think it's a good idea. She wasn't criticizing the idea; she was criticizing the debt.
Lewis: The financing?
O'Reilly: I don't know. Very odd. Moving on, this is obviously the biggest tech deal of all time. The only other thing that would compare would be the AOL/Time Warner (TWX +0.00%) merger back in the late '90s, but that's not really tech. That's more of an -- it's not.
Lewis: Yeah.
O'Reilly: This is a departure from what we've been seeing in tech, though.
Lewis: It is. You're seeing Dell get even bigger, and they're private, so it's like a grain of salt here, but a lot of public tech companies that we're seeing are scaling down a bit. HP is close to completing their spinoff, separating their consumer PC focused business and the corporate IT solutions business they have.
O'Reilly: Even the more successful tech companies are just letting their bank accounts pile up. They're not doing anything.
Lewis: I don't know if that's valuation based and they're just feeling that the market is kind of rich. Similarly, eBay (EBAY 0.19%) spun off the PayPal (PYPL 1.61%) business segment earlier this year.
O'Reilly: Carl Icahn, cough, cough.
Lewis: Yeah. There was some activism there, but I think a lot of tech companies are willing to let these business segments stand alone and have focused management and clear goals and benefits for their shareholders. It's a lot easier to run a more segmented business than to try to manage this blend and have this symphony of all these different businesses.
This isn't a perfect parallel, but you can see how Google restructured to provide each business segment more autonomy. That's a little different, but again, we're seeing that there's a clear CEO for their search business and all their properties. It's a little interesting to see a huge tech acquisition when it seems like a lot of the market is moving the other way.
O'Reilly: Somebody will be proved wrong.
Lewis: Somebody is going to be proved wrong.
O'Reilly: Well, before we move on to the merits of this deal for EMC shareholders, I wanted to point our listeners to a newly redesigned focus.fool.com. There you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. Once again, that's focus.fool.com. There you'll see Dylan and my handsome mugs.
What does this deal look like for EMC shareholders? We'll get to it, but the weird tracking-stock thing.
Lewis: Just to get into the nuts and bolts here; Dell is offering EMC shareholders $24.05 per share in cash and $9.10 worth of this tracking stock of VMware (VMW +0.00%). I think something we didn't get into earlier is EMC owns an 80% stake in publicly traded VMware. Of VMware's ownership -- even though it's a publicly traded company -- only 20% of it is their publicly traded shares.
O'Reilly: One of the criticisms that I've seen of this is that you have no rights. It's a tracking stock. In the event of something bankruptcy-ish, you really have nothing.
Lewis: Yes. What Dell's economic interest with this deal would be 28%, they would control the VMware, which is interesting. There's this tracking stock, and the idea here is that it will mirror exactly what's going on in the publicly traded exchanges, and it is, in itself, something that there's a lot of liquidity with. You can trade it freely.
O'Reilly: I've seen a lot of criticisms that the analysts are pretty sure that this is going to trade for a pretty decent discount.
Lewis: Yeah. I think there's going to be a haircut. I thought there was a really awesome column on Bloomberg View written by Matt Levine. He said: "If you squint, the tracking shares look kind of like the economic equivalent of the VMware shares, but you have to squint pretty hard. They're sort of the VMware shares filtered through Dell's discretion to do whatever it wants with them."
O'Reilly: I'm not suggesting that Dell would do this, but what's to stop them from taking something proprietary and then making their own business? I don't know.
Lewis: It is weird, and because they do have the economic interest there, I don't think there's any conflict. They want VMware to do well. I don't know that that's the issue, but it is bizarre, and it's a weird thing to have to navigate through here. One of the main reasons the deal is being set up this way is because it would have been almost impossible to do it without this type of option.
They would have had to assume a lot more debt to make it happen otherwise. There were thoughts of possibly spinning off VMware, selling it prior to the deal, or making it on the deal, then lessening the value of what you'd be acquiring with EMC. The problem with that is, there would be a huge tax bill associated with it.
I've seen estimates that it would cost $8 billion in taxes for them to sell that segment. That's one of the reasons the deal has been structured this way.
O'Reilly: Unbelievable. I imagine there was some candle burning into the late hours trying to figure out what to do with the VMware. If you're a VMWare regular shareholder, are you nervous?
Lewis: It's weird. You have, all of a sudden, all these extra shares that are available, and they're not ownership shares. Dell has the ownership. You're beholden to Dell, but there are all these other shareholders and they don't have voting rights. It's this very weird thing. It's just bizarre. EMC's announcement of the deal has been relatively flat. There hasn't' been much of a market reaction.
VMWare has gone down. It's lost a couple percentage points since the deal was announced. I think some of that is related to the increased liquidity and the fact that there will not be this major -- it's not privately held when EMC owns it, but it's set aside. There's a lot of stability that comes with that.
There's that side of it, and I think it's also the uncertainty of knowing what Dell's intentions are with it. It's wonky and weird. It's definitely something that you want to get some more clarity on before you'd want to initiate a position with them. If they're on your watch list, they could probably stay there. I wouldn't do anything with them anytime soon. It's something to watch.
O'Reilly: Before we head out here, I was talking with MarketFoolery's Chris Hill earlier. We don't have any notes on this; I'm just curious of your thoughts -- this really doesn't impact Foolish investors right now unless you're an EMC shareholder. Someday, Silver Lake is going to want to cash out at Dell. I would not be surprised if Dell had an IPO again at some point.
Do you think this company is going to succeed? What are your thoughts? This is a $100 billion company now.
Lewis: It's a huge deal, like we said. We underscored the fact that it's a $67 billion deal. It's multiples of the previous largest tech acquisitions. I'm always bearish on huge acquisitions. Especially in the tech marketplace.
O'Reilly: Google's little nibbling here and there is always good, but ...
Lewis: Yeah. I will wait and take smaller gains on a more certain outcome when it comes to this kind of stuff, rather than say, "Yeah! This is going to happen!" I don't want any part of it for the time being. It's going to be interesting to watch it play out. Michael Dell has proved time and time again that he's super innovative when it comes to corporate structure and keeping his company afloat.
O'Reilly: For sure. Pop some popcorn -- it's going to be fun to watch. If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. Again, that's [email protected].
As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!
