DELL
Computer technology giant Dell Inc. is an American privately owned multinational computer technology company based in Texas, United States. About 70 percent of Dell’s business is still tied to it’s core business of personal computers. Bearing the name of its founder, Michael Dell, the company is one of the largest technological corporations in the world, employing more than 103,300 people worldwide. Dell was listed at number 51 in the Fortune 500 list, until 2014. After going private in 2013, the newly confidential nature of its financial information prevents the company from being ranked by Fortune. In 2014 it was the third largest PC vendor in the world. Dell is currently the #1 shipper of PC monitors in the world. In the first half of 2015 Dell showed of 12.6 percent year-over-year growth and revenue of $2.3 billion which placed the company in the second spot with 18 percent market share this quarter. Dell hasn’t released earnings numbers since it went private in 2013, but back then its EBITDA was $4.5 billion. And there is some indication that Dell’s cash flow has slipped since then.

 

EMC

EMC Corporation is an American multinational corporation headquartered in Massachusetts, United States. EMC is a global leader in enabling businesses and service providers to transform their operations and deliver information technology as a service (ITaaS). Fundamental to this transformation is cloud computing. EMC has over 70,000 employees and is the world’s largest provider of data storage systems by market share. On October 12, 2015, Dell Inc. announced that it would acquire EMC in a cash-and-stock deal valued at $67 billion—the largest-ever acquisition in the technology industry. In the first quarter of 2015, EMC finished in the top position within the worldwide enterprise storage system market and ex, holding a market share of 17.4% and a total revenue of $1,531Million. EMC reported an increase in the 2 quarter 2015 by 1.99% year on year, while most of its competitors have experienced contraction in revenues by -4.36%.

 

INDUSTRY OVERVIEW

 

The sector seems to be highly competitive as we can see many players on the market, with a strong presence worldwide. First of all, Dell Inc. mainly competes with Hewlett-Packard Company and Lenovo, but also with IBM Corporation, particurarly in the business hardware and software arenas. Apple is one other strong competitor for what concerns PCs. It is absolutely important the loan of $ 2 bn from Microsoft Corporation who let Dell improve his business in data analytics and cloud services.  Dell’s PCs compete as well with products from HP, Lenovo, Apple, Acer and Asus. However, unlike any of those rivals, Dell no longer offers smartphones. Although Dell continues to sell Windows-based tablets, it no longer competes in the Android tablet arena. At the same time, EMC Corporation has a strong presence in the Electronic Components Industry and his main competitors are Avnet Inc, NetApp, SanDisk Corporation, VOXX International Corporation and West Digital Corporation.

Analyzing the results of Dell and EMC compared with the industry, we can state what follows:

Dell Dell’s Competitors EMC Corp. EMC Corp.’s Competitors
Revenue Growth Y/Y 0.21% 0.89% 1.99% -4.36%
Revenue Growth Q/Q 3.13% -1.79% 6.84% 3.85%
Net Income Growth -72.13% 70.43% -16.56% -43.35%
Profitability – Net Margin 1.41% 15.38% 8.65% 9.48%

Table – Data analysis based on 2013 for Dell, on 2015 for EMC Corp.

 

Most of companies in this sector compete based on their market presence, wide range of products, service or price. Some of these companies also compete by offering information storage, information governance, security or virtualization-related products or services, together with other IT products or services, at minimal or no additional cost in order to preserve or gain in terms of market share.

The main advantages to have to over come next upcoming new challenges are quality, performance, functionality, scalability, availability, interoperability, connectivity, time-to-market enhancements and total value of ownership. It i also required a well-developed distribution channel in order to serve clients worldwide in an efficient way.

Last but no least, offering a full range of expertise before, during and after purchase is one service that, nowadays, this industry can’t miss.

Only the most client-oriented companies will grow and acquire other companies in order to ensure long-term growth and a strong presence.

DELL-EMC TIMELINE

  • 29. Oct 2015 Dell privatization Deal with Silver Lake Partners completed
  • Oct 2014 Hewlett-Packard announces its split
  • April 2015 Dells rolls out aggressive marketing campaign to redefine company
  • May 2015 EMC acquires Virtusstream (cloud computing software company)
  • July 2015 Silver Lake manager expresses admiration for EMC’s “federation model”. A report suggest that Dell wants to spin off its CyberWork security business in an IPO
  • Aug 2015 EMC endures continued pressure from investor Elliott Management
  • 08 Oct 2015 innital report suggests that EMC and Dell are making a deal. NYSE 27.18
  • 12 Oct 2015 Del-EMC deal is officially confirmed. NYSE: 28.35

 DEALTERMS[1]

 Looking at deal financials, we can immediately understand we are studying an huge deal, one of the biggest in the history: following data are in EUR million.

Implied Equity Value 55,987.19
Net Debt -283.53 (incl. ST investments: USD 1.939 bn)
Enterprise Value 55,703.66
Deal Value 55,703.66

We can now go over, analysing the share price, underlying that the Offer Price per Share was EUR 28.86, including the Premium paid to acquire each share.

freccia (2).jpg

Moreover, market multiples implied are positive, as follows.

deal finan.png

DEAL RATIONALE

 

What brought Michael Dell and the company’s management to acquiring EMC in a $67bn deal?

The combination of Dell and EMC will create the largest “privately-controlled, integrated technology company.”

Expensive or not, Dell, led by CEO Michael Dell, would be able to expand its business and gain entry into a key part of the data storage market. It would also get control of the software company VMware.

EMC’s investment in VMware (VMW) has been a success driving the Group’s growth. Out of $24.4bn in revenues, EMC last year generated $5.5bn in free cash flow, resulting in a 22.7% cash flow yield. Stable and solid free cash flow will help repay the new $50bn debt issued to finance the transaction.

Furthermore, relevant synergies are expected from the transaction, with revenue synergies expected to be $2bn, that is three times the cost synergies. Indeed, Dell is planning to sell EMC’s solutions to some of its customers, pointing to over $1bn in potential additional annual revenue. As a result, Dell will complete its product offering, thus recovering a competitive advantage relative to competitors like Hewlett-Packard and IBM.

Moreover, the transaction is in line with Dell’s strategy to widen its portfolio from a prior focus on personal computers to now also include data storage capabilities including servers, cloud computing and virtualization.

However, does this deal make any strategic sense? It does on paper. Dell and EMC overlap very little. Dell posts about $56 billion in annual revenue according to an estimate, most of which comes from PC sales and a little of which comes from enterprise storage. EMC is the world leader in storage gear, and for the most part its products do not overlap with Dell.

The two businesses are largely complementary: combining them could yield a company with about $80 billion in annual revenue and free cash flow of about $7.7 billion.

Both PCs and enterprise storage are declining or slow-growing markets. The argument for combining the two is to create a unified vendor for PCs, servers, software and storage.

[1] Source: Mergermarket.

Authors:

Antonio Conte, Head of M&A

Thea Wrobbel, M&A Associate TMT

Riccardo Pizzino, Head of Treasury & Legal

 

 

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