Singaporean firm Temasek is joining Dell's investment firm MSD Partners and Silver Lake in the buyout group. The deal is the largest ever in the technology industry and combines two of its biggest players.
It also reflects the restructuring and deal-making occurring the industry as large enterprise groups react to changes in technology paradigms as well as the intersection of shareholder activism and private equity. Elliott Management had pressed EMC to consider a breakup or a sale over the last year. EMC Chairman and CEO Joe Tucci told investors in a Monday call that Michael Dell approached him about a year ago, and that deal talks grew more serious in the past year.
By merging, Tucci said, the companies hoped to weather the "massive disruption" and seize the "unprecedented opportunity" as cloud computing, the proliferation of networked devices and other forces rework IT. The offer includes $24.05 per share in cash and 0.111 shares of a tracking stock in EMC's publicly traded cloud software group VMware (VMW - Get Report) .
The deal parties valued the offer at $33.15 per share based on VMWare's average volume-weighted price of $81.78 on Wednesday. However, shares of VMWare dropped $6.66, or 8.5%, to $71.99 on Monday morning. Shares of EMC gained 58 cents, or 2%, to $28.44.
Elliott senior portfolio manager Jesse Cohn said the firm "strongly supports" the transaction. When the New York hedge fund lobbied for change at EMC a year ago, the firm argued that the company would be worth $40.05 per share in a breakup. In a statement on Monday, Cohn suggested that VMware tracking stock would gain because of the benefits of the deal and because of greater liquidity.
"A lot has happened in the last year," Tucci said of the spread between Dell's buyout offer and Elliott's breakup scenario. FBR & Co. analyst Daniel Ives valued the deal at 16 times fiscal year 2016 earnings per share. "While many EMC shareholders will likely argue that breakup value is in the $35-$38/share range (and we strongly agree), it appears that Tucci/board would rather go down the aisle with Dell than pursue a breakup, a smart strategy, in our opinion-as the $33 price tag is very fair," he wrote in a report.
The merged companies would have more than $80 billion in revenues, the companies said. While VMware already has partnerships with Dell, the company would be able to sell more after the deal. Tucci will stand down after the deal closes, with Michael Dell leading the combined companies. The deal contains a go shop clause that allows EMC to field better offers. Tucci would not say if it had received other expressions of interest.
The EMC deal comes as Hewlett Packard (HPQ - Get Report) is splitting into groups that serve corporations and consumers. After the split, HP would have more flexibility to make deals. Michael Dell, MSD Partners, Silver Lake and Temasek are contributing new equity. The group will also raise debt and use cash on hand to finance the group.
Dell said it would reduce leverage rapidly in the two years after the deal and suggested the transaction would have a "neutral to positive" impact on is credit ratings. That may help the deal overcome tightening conditions in the credit market. Standard & Poor's affirmed its BB+ rating on Dell, but put placed ratings for the company's senior secured and senior unsecured ratings on watch with negative implications.
The agency also put EMC's A rating on watch with negative implications. Moody's Investors Service put Dell on review for an upgrade.