CEO Daily: Tuesday, October 13.
The Tweet of the Day yesterday came from Chris Dixon of Andreessen Horowitz, who asked: “Someone please explain why HP is splitting up while Dell and EMC are merging despite the fact they are in exactly the same business?” “This is a real opportunity for HP. Computer-maker Dell Inc struck a deal on Monday to buy data storage company EMC Corp for $67 billion, setting a record in the technology industry, as it tries to transform itself into a giant in the fast-growing market for managing and storing corporate data.
HP ENTERPRISE CEO Meg Whitman has criticised Dell’s acquisition of EMC, saying that the firms will be overridden by debt and that the deal will be disruptive to customers. His proposed $67 billion acquisition of cloud computing company EMC EMC 1.76 % would be the largest tech merger on record and would create a privately held giant with more than $80 billion in annual revenue—roughly the scale of IBM. The acquisition, the year’s third-largest in all sectors, highlights the frenzy of dealmaking sweeping the economy, as big or mature companies take advantage of low interest rates to buy rivals as a way to spur growth. Paul Perez, who was named chief technology officer of Dell’s Enterprise Solutions Group in March, told the media at the forum that he has a high degree of respect for EMC because it has been through an aggressive transformation, from a provider of data storage and protection to an integrator of systems. “EMC is a well-diversified systems vendor and systems integrator that has a fair degree of complementary value to Dell at a product portfolio level and also at market level,” Perez said. “We think that this is a case of one plus one being greater than two,”the Dell CTO said, adding that EMC provides solutions primarily to large enterprises while Dell is focused on medium-sized enterprises.
Dell announced the purchase of EMC on Monday, which at $67bn is the largest technology merger of all time, topping Avago Technologies’ $37bn offer for Raspberry Pi chipmaker Broadcom in May. Tucci, and a top lieutenant quietly met with a co-owner of Dell to discuss what eight months later would become the biggest takeover ever of a technology company. IBM -0.82 % Nearly one-third of the stated value is riding on a plan to create a tracking stock for VMware, but the deal leaves the visual software company looking like devalued currency, writes Heard on the Street’s Dan Gallagher. The deal should help privately held Dell, the world’s No. 3 computer maker, diversify from a stagnant consumer PC market and give it greater scale in the more profitable and faster-growing market for cloud-based data services. In other merger news, brewer SABMiller SBMRY -0.18 % said this morning that it has agreed on the key terms of a sweetened takeover offer by AB InBev valuing it at about $104 billion, setting the stage for the world’s two largest beer makers to combine.
Adding the data storage provider to its own suite of offerings, including network servers, will bolster Dell’s standing as a major one-stop shop for business customers. Under the terms of the agreement, EMC shareholders will receive US$24.05 per share in cash, in addition to tracking stock linked to a portion of EMC’s economic interest in VMWare Inc., a maker of cloud-based virtualization software. Getting to Monday’s announcement of the transaction was a yearlong journey of some 50 confidential meetings in private homes and hotels in suburban towns across the country, drawing in Tucci, Michael S Dell and top bankers like Jamie Dimon of JPMorgan Chase.
In the first half of its latest fiscal year, Dell’s revenue, net income and cash flow from operations were all lower than in the same period a year earlier. Steering clear of mentioning HP’s own Autonomy acquisition, which didn’t quite go to plan, Whitman concluded: “All of this at the very moment when we have completed our journey to create two new, focused companies. “We’re organised, we have a strong balance sheet and our innovation engine is humming. More important, it meant testing the limits of the debt markets, as Dell and its partner Silver Lake would be seeking to raise more than $40 billion in financing when turmoil had recently roiled investors.
Worth noting that when we asked Fortune 500 CEOs earlier this year whether their company would be easier to manage if it were private, 84% said “yes.” Meanwhile, Joe Tucci’s exit from EMC will come with a big paycheck. Seib writes that the current political turmoil—and the unusual presidential campaign season—is simply a mirror held up to a changed political face of America. I’ll be spending it with Fortune’s Most Powerful Women in Washington, where I’ll ask another big tech competitor, IBM CEO Ginni Rometty, what she makes of the Dell deal.
The world’s two largest brewing companies look poised to merge as SABMiller decided to recommend a slightly improved, informal offer from larger rival Anheuser-Busch InBev in a deal that values SABMiller’s equity at $104 billion. Justice Department is looking into allegations Anheuser-Busch is buying distributors to curb competition from fast-growing craft brewers by preventing them from getting their product on store shelves. FBR Capital Markets analyst Daniel Ives said shareholders were concerned, however, that VMware would lose talented employees amid uncertainty about their future under Dell, eventually hurting the company’s performance. Defenders of Dell’s decision to go private might brush off its weaker performance by arguing that sometimes a company in flux needs to take financial hits to reposition itself.
At the same time, EMC was coming under pressure from Elliott Management, a $27 billion hedge fund that has profited by shaking up technology companies. Companies go private, they might add, precisely to avoid the pessimism and second-guessing that takes place when a firm reports a couple of subpar quarters. Reuters Eli Lilly’s shares slipped badly on Monday after the drug maker said it would discontinue trials for a heart treatment – the only cardiovascular-focused treatment in the company’s late-stage portfolio.
Jenkins had led a strategy to make Barclays less reliant on its investment-banking operations, but now a decision to appoint a veteran of that world signals a reversal. The merger agreement includes a 60-day ‘go-shop’ provision that allows EMC to solicit bids from other parties and pay a discounted breakup fee to Dell if a deal is made with another company, as Reuters first reported on Sunday. By that point, Tucci — known for hinting at retirement and then not leaving — had wondered how to handle succession at his company, with speculation growing louder among analysts and media outlets about who would become EMC’s next leader. While IBM, Cisco, Oracle Corp and Hewlett-Packard could potentially be suitors for EMC, the chances of them challenging Dell with a rival offer are slim, people familiar with the matter told Reuters. Activist hedge fund Elliott Management, which has a 2.2 percent stake in EMC and had been calling for a break-up of the company, welcomed the deal with Dell and said it was the best outcome for EMC shareholders. “Elliott is pleased to participate in VMware’s ongoing upside through the tracking stock, which will benefit from both meaningful synergies as part of Dell’s organization as well as far greater liquidity than VMware shares have today,” Jesse Cohn, senior portfolio manager at Elliott, said in a statement.
The men have a long professional relationship that goes back to a business partnership that involved Dell selling some EMC storage products for several years. (Those ties ended somewhat acrimoniously, however, when Dell built out its own offering.) The contact came during the World Economic Forum in Davos, Switzerland, in January, when Michael S. The bank has reportedly told regulators he is the frontrunner for the job and if approved, the appointment could be announced within two weeks, sources told the news agency. Dell first approached EMC in October 2014 following speculation over a deal between Hewlett-Packard and EMC collapsing and Elliott attacking the company, the source said.
EMC also published preliminary third-quarter earnings on Monday, saying it expected earnings excluding some items to be 43 cents per share, slightly below analysts’ average view of 45 cents, according to Thomson Reuters I/B/E/S. Treasury Secretary Larry Summers, who declared the global economy in “serious danger.” Erdoes struck a far more bullish tone, pointing out consumers are spending and they aren’t as levered as in the past. But I also recognize the need for change, and size, coupled with focus of mission, and capabilities, matter!” Tucci wrote in a blog post on EMC’s website. And in the latest period, Dell appears to have squeezed more cash out of sources than it might be able to repeat, such as by pressing its customers to pay more quickly. Curt Garner will join the fast-casual Mexican restaurant chain next month, a move that comes as technology becomes an increasingly important component of how restaurant chains can compete for business.
Cash flows also benefited from a large positive change in a line called “other assets.” Some analysts, however, note that EMC has robust cash flows, which could support the merged entity and help service and pay off the debt Dell will have to take on to finance the deal. “You are going to have an entity that has significant free cash flow that can be deployed to pay down the debt,” Lane of Moody’s said. Fortune The nation’s biggest bank by assets is looking to save tens of millions of dollars by eliminating support for BlackBerry wireless devices next year and also mandating that some employees pay for their own phones – regardless of the manufacturer that’s used. The move is part of a broader effort to trim costs as a lack of rising interest rates, along with sluggish trading revenue, has hurt profit growth for banks. Other senior JPMorgan executives — including Rod Reed, a vice chairman of investment banking; Kurt Simon, global chairman of mergers and acquisitions; and James P.
One was convened on Sept. 2 at a hotel in the New York City suburb of Morristown, New Jersey, where more than 50 executives gathered to continue hashing out the outlines of a deal. (As it happened, Casey of JPMorgan lives nearby.) EMC’s board continued to have questions about whether Dell and Silver Lake could afford a deal. Dell and Tucci prepared to board yet another flight — to San Francisco, to jointly attend a dinner that Durban was hosting at his Silicon Valley home on behalf of Temasek, a Singaporean sovereign wealth fund that was co-investing in the EMC deal.