"Right now, this [financing a takeover] would be a tall order," said Martin Fridson, chief investment officer of Lehmann Livian Fridson Advisors.
Credit market conditions turned volatile in September with the stock market's pullback following China's decision to devalue its currency. Conditions have improved as the public markets have stabilized, and, Fridson said, could be dramatically improved by the time a debt financing for any Dell purchase of EMC actually takes place -- transactions that could be months down the road.
Nevertheless, at least five prospective credit offerings have run into trouble this month. The Wall Street Journal reported this week that Goldman Sachs (GS) and JPMorgan Chase (JPM) are struggling to sell $1.2 billion of loans backing the leveraged buyout of online clothing retailer FullBeauty Brands by Apax Partners. On Oct. 8, SiteOne Landscape Supply -- a landscaping business formerly part of Deere (DE) that was bought two years ago by Clayton Dubilier & Rice -- withdrew its proposed $350 million dividend recapitalization loan due to market conditions.
Besides those, Xerium Technologies (XRM) , a manufacturer of products used primarily for paper production, pulled a proposed $495 million credit facility that was to be used to refinance its existing debt obligations. Apple Leisure, a travel company that provides all-inclusive vacation packages, pulled a proposed $510 million credit facility that was planned as a dividend recapitalization for its private equity sponsor, Bain Capital, which acquired the company in a 2012 LBO. ABB Optical, a contact lens distributor, withdrew a $650 million credit package that was planned to refinance $269 million of debt and capitalize a $269 million dividend payment to its financial sponsor New Mountain Capital. (Standard & Poor's LCD reported on those three proposed credit facilities -- and their withdrawal.)
Still, Fridson added, "Market conditions can settle down quickly." And, of course, there's no projecting just when -- if ever - Dell might be approaching the debt markets for financing for the transaction.
The level of accommodation in the debt markets figures to play a role in what it is that Dell is likely to do. "One thing that makes this deal questionable is whether they can get financing for it," said Peter Cohan, a lecturer on finance at Babson College, adding that "the benefits of this merger aren't obvious to me."
Compounding the difficulty in projecting the success of a merger attempt is the issue of how much financing would be needed. "I think it comes down to how much of a check Silver Lake is willing to write," said Michael Dimler, who covers EMC at Morningstar. Silver Lake Partners collaborated with Michael Dell, the founder of Dell, in the 2013 take-private of the computer maker that Dell founded.
What would it cost to take out EMC? The company has a market capitalization of $52.5 billion. CNBC reported Thursday that EMC could need as much as $40 billion in financing for a takeover, a figure that not only dwarfs the $25 billion take-private price tag of Dell itself, but which would qualify as one of the largest technology company takeovers in history.
Of course, that's for the whole of EMC.
Its stake in cloud and virtualization software company VMware (VMW) , where it holds 80% of the $32 billion market cap company, is worth about $25 billion, and perhaps a bit more. "A big question in the financing is tied to issues like spin-outs" of assets, Dimler said. Buying EMC, not including its VMware stake, would still value the transaction at about $22 billion, according to a research note from Wells Fargo Thursday.
Activist investor Elliott Management has been advocating that EMC sell off its stake in VMware. Elliott agreed to a standstill pact earlier this year, partly in exchange for representation on the EMC board, but is still regarded as an advocate of that strategy. EMC, though, is seen as resistant to such a spinoff, given that it's considered a mature company with a relatively modest growth rate, and benefits from the more-dynamic sales of VMware.
Wells Fargo, in its research note, talked of the benefits, not of spinning off VMware, but of further integration with EMC. "A combination of EMC and VMW would, in our opinion, not only benefit the companies from a cost perspective but also from a revenue synergy perspective," an analyst said in a report.
The timing of a Dell bid could be inauspicious, at least from the credit market's perspective. "I think the rate on the debt associated with such a deal would be higher than it was six months ago," Cohan said.
Ultimately, the credit markets figure to be the governor of whether this transaction is executed. As Wells Fargo noted, "The key question is whether Dell could raise the capital needed to take out EMC."