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The ‘go shop’ period, which allowed EMC to seek out other potential suitors, expired on Saturday. While this would often be seen as a significant milestone, the hurdles ahead are far more perilous.
There was never any real chance that another company was going to come forward with a better offer and so the ‘go shop’ period was an exercise in futility. The fact that the deadline has passed isn’t really news at all.
More interesting, are the obscurities of this inexplicably complex deal, which become more intricate by the hour. On Monday, Dell publicly disclosed its quarterly financial results for the first time since the company shifted back to private ownership in late 2013.
The disclosure highlighted just how leveraged the $67bn transaction would be. Dell's revenue declined by 6% year-over-year to $14bn in the quarter ended in July. Operating profit stood at $3.2bn excluding charges, compared to $4bn before the company was taken private.
Dell will have to take on approximately $50bn of debt to see the deal through. It’s no surprise then that Dell is now looking to shed some heavy assets.
The PC-maker is actively seeking a buyer for a key component of its technology outsourcing business, Perot Systems, for approximately $5bn. Arik Hesseldahl of Re/code revealed that Dell has already approached several potential buyers, and even entered into advanced talks with Tata Consultancy Services, however, negotiations broke down based on the hefty price tag.
Forcefully nudged by its private backers, Silver Lake Partners, Dell filed for an IPO of SecureWorks earlier this, a business that could be valued at as much as $2bn.
Other candidates likely to be on the proverbial chopping block include cloud software integrator Boomi, Quest Software and SonicWall. Dell hopes to free up at least $10bn by streamlining its portfolio.
There is also the distinct possibility that EMC could look to sell RSA Security, reducing the size of the megadeal.
VMware share price fisco
In a story that continues to evolve by the day, VMware yesterday announced that it is walking away from the Virtustream joint venture with parent company EMC. In an 8K filing to the United States Securities and Exchange Commission, the virtualisation company said:
"VMware announced that it will not be participating in the formation of the Virtustream Cloud Services Business previously announced by EMC and VMware on October 20, 2015."
The original plan had been to create a new entity out of Virtustream, jointly owned by EMC and VMware. VMware would contribute up to $250m in start-up capital and assume half of the first year losses, which were expected to be significant. For some baffling reason, VMware investors were not happy with the terms of this new venture and the share price tumbled 27% in the two months that followed the announcement.
VMware will be hoping that by walking away from the venture, confidence in the Federation’s most prized asset will be restored.
There was some more semi-good news for VMware shareholders this week. According to Reuters, Dell said in a registration statement on Monday that it could potentially buy back at least $3bn in VMware tracking stock, assuming net income was high enough. Along with the Virtustream deal, the special share arrangement has weighed heavily on VMware’s stock price and the filing demonstrates Dell’s intent to reverse the downward trend.
However, the filing also made clear that Dell’s number one priority in the first 18-24 months would be to reduce its debt load, meaning that any buy-back of VMware tracking shares would not happen for some time. Whether this distant gesture is enough to boost the value of VMware’s shares in the here and now remains to be seen. As of right now, the share price has yet to demonstrate any meaningful reaction.