Dell and EMC: What do the customers think of it?.
EMC holders will receive a package of $24.05 in cash and 0.111 shares of VMware (VMW) tracking stock that we estimate was worth about $31 per share on Friday, below the stated value of $33.15 cited in the linkup announcement press release. Customers and analysts are cautiously optimistic about the eventual outcome of the world’s biggest-ever technology deal – Dell’s $67bn acquisition of EMC.Many EMC customers are concerned that Dell’s pending $67 billion acquisition of the data storage giant will be a distraction and ultimately unsuccessful.
I was sitting in a conference on enterprise infrastructure this week when I realized that the generational shift long promised by cloud advocates is finally, irreversibly underway. And one of those repetitions is the preponderance of megamergers and acquisitions late in economic expansions and bull markets, which are the results of confidence brimming over in C-suites and the sense that opportunities are endless. That shift is away from “legacy” data centers built on x86 servers, VMware-managed hypervisors, SQL databases from Oracle, and storage hardware provided by EMC.
EMC’s CEO Joe Tucci said the deal will create a new leader in the most critical areas of the $2 trillion IT market, “including digital transformation, software-defined datacenter, hybrid cloud, converged infrastructure, mobile and security”. That has disappointed some current EMC holders, Vipal Monga reports, as holders of the tracking shares will have no voting rights, and would get nothing if Dell goes bankrupt. Replacing all that are web-scale (or at least wannabe web-scale) technologies based on containers, commodity hardware, NoSQL databases of various kinds, and flash storage. Downside seems limited because EMC has other options if the deal falls apart, such as a spinoff to its shareholders of its 81% stake in VMware, the valuable maker of virtualization software. That’s mainly a euphemism for cost-cutting, largely through reduced head counts, rather than the rare phenomenon of one plus one adding up to three, something seen mainly in the consultant community, not the real world.
It’s budget planning time for technology decision makers as they look ahead to next year and plan on where to focus their IT resources to make the biggest impact. EMC is known for its data storage know-how, for it’s long-serving chairman Joe Tucci, and for its use of non-compete agreements to keep employees from working for rivals.
But even griping EMC shareholders say they’re willing to accept the tracking stock to get the deal done. “It’s not ideal,” said Jeff Helfrich, a portfolio manager at Dallas-based asset manager Penn, Davis, McFarland Inc., which owns about 660,000 EMC shares. It also signals that both EMC and Dell will have hard work ahead of them to reassure customers about the acquisition’s benefits or risk losing some of them to rivals. But who really cares about that architecture, except the billion-dollar infrastructure companies that are about to take a giant hit in their valuations? Now, venture capitalists and entrepreneurs in Massachusetts, where EMC is based, hope that Dell (which is buying EMC for $67 billion) might temper that litigious fervor.
The spinoff strategy had been advocated by investment firm Elliott Management, which wrote a letter to EMC management a year ago arguing that the company was worth $40 a share. And the Dell-EMC and AB InBev-SABMiller nuptials, if approved by regulators, will be made possible by nearly $120 billion from the corporate bond and loan markets. Meanwhile in its letter to customers Dell talked about bringing together its strength in small-business and the mid-market with EMC’s strength in large enterprises. EMC Federation EMC -0.07% is a collection of six independent business units that is one of the biggest suppliers of data center technology along with data analytics, security, and consulting services.
The current EMC price is only $3.75 more than the cash portion of the Dell offer, meaning that investors are assigning a big discount to the VMware tracker. On the technology side, VMware, the wholly-owned subsidiary of EMC – apart from the 15 percent floated on the NYSE in 2007 – has been described by VMware CEO Pat Gelsinger as the “crown jewel” of the merger. “To us the deal is about growth and having Dell and EMC come together in a larger entity accelerating the growth of VMware. These companies might not quite be the walking dead, as Wired called them this week, but they are certainly headed for a world of hurt, which is why Dell is trying to buy EMC: It needs to shore up its legacy business. For the report, 451 Research surveyed 447 executives responsible for their company’s technology buying to gauge their immediate reaction to the Dell-EMC deal.
In this case, Dell, now private and headed by CEO Michael Dell, probably decided to issue a tracking stock for VMware to EMC holders in order to give them continued exposure to VMware and make it easier to finance the deal, which still may require nearly $50 billion of debt. Their responses, which came less than 24 hours after the deal was announced, provide a window into thinking across a large swath of business technology customers, their feelings about the acquisition, and perception of the companies themselves. You don’t have to care whether the datacenter is using HP and Dell hardware or some cheap commodity CPUs built to spec by the cheapest possible manufacturer.
Moody’s Investors Service actually placed Dell’s Ba2 rating (the second-best junk grade) under review for a possible upgrade on the basis of the EMC acquisition—the opposite of what typically happens in a megadeal funded with megadebt. “A key driver for the review for upgrade is Michael Dell’s commitment to rapidly delever, which will be supported by projected free cash flow in calendar 2017,” the ratings agency wrote. In his letter, Tucci wrote that “The combined company will be far more efficient and effective to operate as a private company,” a reference to Dell’s status as privately-owned.
All you need are virtual servers you can spin up on a moment’s notice, the ability to deploy containerized apps into that environment, and support for the unstructured databases you need to handle the massive influx of bits you’re about to start collecting and will need to analyze. Nevertheless, according to a snap survey by analyst firm 451 Research in general, customer perception is encouraging: 31 percent of the IT decision-makers it surveyed describe the acquisition as a positive move, compared with 20 percent who see it in a negative light. 451 Research said that optimism among existing Dell customers is probably because they typically feel comfortable buying a variety of products from PCs to servers and see more to gain from the acquisition than EMC’s storage customers or virtualization-centric VMware clients, who may simply see Dell as a PC company. Neil Hunt, the chief product officer and vice president of engineering for Netflix, was speaking at the Engineering Summit on Infrastructure, which had been organized by Engineering Capital, a small, enterprise-focused VC fund. Donatelli ended up staying at HP HPQ 0.31% but was precluded from working on that company’s storage business for a year even though California, HP’s home state, generally does not recognize non-compete agreements.
The 451 Research analysts warn that in the meantime competitors will be trying to capitalize on the uncertainty: “In the meantime, many IT decision-makers will likely be open to fielding sales calls from competitors. General Electric Co. deserves a higher earnings multiple for transforming itself into a pure industrial company—but maybe not as high as the market now thinks, Ahead of the Tape’s Spencer Jakab writes. The fact that companies can pursue non-competes in-state means that talented people—the sort of people who may want to start a company—often decamp to California where they see fewer restrictions on hiring and a start-up friendly climate. A former Dell executive told Fortune that the company’s contracts do include a non-compete clause tied to the employee’s compensation. “Basically, by accepting the compensation you are agreeing to the non-compete so there is a potential for claw back.
Cl A U.S.: NYSE USD16 0.25 1.5873015873015872% /Date(1445029210383-0500)/ Volume (Delayed 15m) : 11189848 AFTER HOURS USD16.02 0.02 0.125% Volume (Delayed 15m) : 2149 P/E Ratio N/A Market Cap 2520000000 Dividend Yield N/A Rev. per Employee 488757 More quote details and news » (FDC) found out last week. But while “his vision and execution has been mostly good, the Federation is largely a failure and many of his lieutenants have not run their businesses as well.” Virtualization has swept through the data center in recent years, enabling IT transformation and serving as the secret sauce behind cloud computing. Hunt plans to power down his company’s last data center this year, at which point Netflix will be running almost entirely on outsourced cloud infrastructures, mostly operated by Amazon. (It’ll still run its own content delivery network — CDN.) Note that this timeline is new. Its return to the public markets following its top-of-the-market LBO was underwhelming, priced at $16 a share, below the initial public offering’s $18-$20 projected range, and barely holding on to the IPO price at week’s end.
Concerns about the economy and jitters in credit markets are prompting skepticism about issuers that aren’t very profitable or are carrying heavy debt loads. Netflix originally said it would shut down its last datacenter in 2014, and then again this past summer, but the future sometimes comes a little slower than expected. The $2.5 billion in offering proceeds fell short of management’s expectations of $3.5 billion, as well as those of KDP Investment Advisors, a Montpelier, Vt., high-yield analysis outfit. Albertsons Cos.’ postponed IPO marks a setback for the beefed-up rival to supermarket leader Kroger Co., as it seeks to pare debt and invest in store upgrades to woo fickle U.S. shoppers.
Gleb Budman, the CEO of Backblaze, which also recently began providing storage services that compete with AWS, asked Hunt if he’d consider using other cloud providers, even piecemeal. A stark example of the difference between how the credit and equity markets sees things is evident with Netflix NFLX -2.0773568107626867% Netflix Inc. Fortune contacted Dell for comment and will update the story as needed. “When it comes to enforcing non-competes in enforceable states, the big enterprise hardware makers are pretty much the same.
When a departure is very public and maybe embarrassing, companies get very aggressive and go on offense,” said Patrick Moorhead, president and principal analyst of Moor Strategy & Insights, an Austin, Texas-based research firm. According to the statement: “Cisco and VCE also have long-term engineering, resale and support agreements in place to enable our joint collaboration and business. Many companies are boosting the percentage of worker paychecks automatically diverted to 401(k) plans well above the standard 3%, in the latest attempt to transfer the burden of retirement costs to workers. AWS has an enormous head start, but there is still no standardization of cloud services — something that Hunt believes will be necessary. “Let’s get it right.
Let’s make a standard toolkit that software engineers use when building software, just like hardware engineers use when building a bridge,” Hunt said. While that dog-ate-my-homework excuse sent Netflix stock tumbling 12.7% last week, it’s still double its 52-week low and fetches a mere 350 times next year’s average earnings estimate.
Tech-startup incubator Y Combinator has raised a $700 million venture-capital fund aimed at expanding ownership stakes in its most successful companies. And Bloomberg finds that only a half-dozen stock analysts have Sell ratings on the video-streaming outfit out of the 45 recommendations it tracks, and none from a major bank with an underwriting business. KDP issued a Sell recommendation on Netflix bonds last week, noting the persistent negative cash flows from the heavy investing in programming, even as subscriber rolls expand, especially internationally. So far, the stock bulls haven’t minded the heavy spending, in hopes of the big potential payoff as video on demand possibly supplants traditional viewing. Netflix Inc. is facing skepticism from credit card industry executives and experts after the firm said payment miscues contributed to worse-than-expected subscriber results.
The company said the move by U.S. banks to replace hundreds of millions of credit and debit cards with new computer chip-enabled cards this year has created payment processing problems that led to involuntary service cancellations. Sacconaghi wrote that investors believe the tracker “discount might be 5% to 15%.” The $33.15 per-share deal value that the two companies trumpeted when the transaction was announced last Monday reflected a VMware share price of almost $82 on Oct. 7 and no tracker discount. KDP doesn’t think they’re getting paid enough—coupons range from 5.375% to 5.875% on bonds due in six-to-10 years with mid-level junk ratings (B1 by Moody’s, B-plus by Standard & Poor’s). Glencore PLC has put together a plan it hopes will result in a credit-rating upgrade, a previously undisclosed part of the firm’s attempt to strengthen its balance sheet. Yum Brands Inc. said it nearly completed a strategic review of its business and announced it is adding to its board an activist investor who has called for the owner of KFC and Pizza Hut to spin off its troubled China operations.
Attorney’s Offices for the Southern District of New York and the Massachusetts district over its drug pricing, the stock dropped further, although it rallied 5% on Friday, ahead of Monday’s earnings report. The world’s biggest airline faces its biggest merger-integration test this weekend, when American Airlines Group Inc. shifts its US Airways unit onto its reservation system.
The new American has been preparing since it was formed 22 months ago for the complex information-technology fusion, a step that has gone poorly for some rivals. These problems have been years in the making, writes Vicki Bryan, an analyst at Gimme Credit, an independent credit research firm. “Valeant’s primary strategy has long been founded upon virtually continuous, debt-funded acquisitions of typically troubled drug and health-care companies and then jacking up prices excessively on acquired products, while slashing costs via firing most of the target’s employees and decimating R&D—scoring virtually immediate profits without adding any value to sick and vulnerable patients who need the drugs.” Valeant’s ability to hike prices allows it to pay “inordinately expensive multiples” for companies and take on “excessive debt” to pay for them, Bryan continues. “So rolling back pricing now would not only slash [earnings before interest, taxes, depreciation, and amortization] on lower revenue than Valeant previously modeled, it also indicates Valeant’s underlying asset value is also substantially lower. United Continental Holdings Inc., which merged in 2010 and made the system transition in early 2012, disrupted passengers and employees alike for weeks. It also will be tough for any other company to mount a counterbid for EMC due in part because Dell has lined up financing and advice from nearly all of the major Wall Street firms, which makes it tough for them to defect to another bidder. As a result, Valeant’s already troublingly high leverage would spike even higher on its massive debt load, at the same time its ability to repay that debt becomes impaired and its book value becomes substantially overstated.
This dramatic increase in Valeant’s credit risk has not been lost on bondholders, which also are selling off Valeant’s bonds on heavy volume.” The dependence on debt is beginning to worry some equity investors, who have generally feasted on companies’ ability to borrow cheaply to put money in shareholders’ pockets. Shareholders of the Taiwan-based chip-assembly company Siliconware Precision Industries Co., or SPIL, voted down Hon Hai Precision Industry Co.’s plan to increase its share capital Thursday, which would have allowed Hon Hai to become the largest shareholder in SPIL.
If the release of “Paranormal Activity: The Ghost Dimension” is judged a success, Paramount’s distribution experiment could rewrite how studios release movies and when viewers are able to watch them at home. Tucci cited the “disruptive” transition in information technology that is disadvantaging EMC, and he argued that $33.15 would be the highest price for EMC since 2001. The studio plans to release the movie on home video about two weeks after it leaves most theaters—severely curtailing the 90-day “window” that theaters have traditionally had to show a movie—a strategy which has alienated many theater operators. But the desperation for income also led to the rush into such things as master limited partnerships and high-yield Puerto Rico municipals. “I do believe these deals should be a warning to investors in the investment-grade bond market, because the increased leverage the companies will be carrying could become a problem in the next slowdown,” he says. Comcast Corp.’s NBCUniversal will launch a comedy-focused subscription video service for $3.99 a month featuring content from the likes of Jimmy Fallon and other talent.
Bad news continues to be good news in that it staves off a Fed rate liftoff, which fed-funds futures now see happening next March at the earliest, while Fed watchers cling to forecasts of a December hike, just as they did for September, June, etc. He already appears to have doubled his $4 billion investment in the Dell LBO and will be contributing some of the $4.25 billion of equity to the EMC buyout. More importantly, the reduced Fed hike expectations filtered into the foreign-exchange market, where the dollar eased further, reducing the pressure on beleaguered emerging-market currencies.
Given the massive leverage at EMC and the opportunity for cost-cutting there, he could make billions if the EMC deal works and the combined company goes public in a few years. Pharmaceutical companies have paid more than $3 billion in fines to resolve pricing cases over the past decade, according to Patrick Burns, co-director of Taxpayers Against Fraud, a group that promotes whistleblowing.
A U.K. regulator has held firm on a law to force banks to segregate their retail and investment-banking operations, setting the stage for more painful restructuring at British lenders. Big U.K. banks are required to separate their retail banks from investment-banking activities by 2019 in a bid to ensure depositors and small businesses aren’t put at risk if a lender’s investment banking operations fail. A global effort to prevent cyberweapons from reaching malicious regimes is at risk of coming apart amid objections from U.S. companies who claim it would upend the way they use and sell legitimate spyware. In the wake of the Arab Spring uprising, the U.S. and 40 other nations decided that virtual weapons should be subject to the same export control rules that have been used on heavy or unconventional weaponry like tanks and chemical weapons.
But officials can’t agree on the legal distinction between nefarious computer programs that spy on networks and the software that helps companies avoid hackers. The move comes as daily fantasy companies, namely industry giants DraftKings Inc. and FanDuel Inc., face growing scrutiny over the legality of their business model and the oversight of their operations. The broad range of federal offices pursuing Volkswagen suggests they are targeting the auto maker and employees over alleged offenses ranging from pollution to misleading officials to consumer claims.
The hot startup has stopped collecting tiny vials of blood drawn from finger pricks for all but one of its tests, backing away from a method the company has touted as it rose to become one of Silicon Valley’s hottest startups. Goldman delivered a disappointing earnings report that reminded investors how dependent it is on buying and selling stocks, bonds and commodities like oil—and how heavily those trading businesses rely on hedge funds and other professional money managers whose jitters about the global economy can make or break results. General Motors Co. said global sales fell 3.1% in the third quarter amid continued weakness in South America and a reduced presence in Russia and other markets.
Chief Executive Paal Kibsgaard said previous cost-cutting initiatives and the company’s transformation program enabled Schlumberger to protect its financial performance “in what is shaping up to be the most severe downturn in the industry for decades.” AMD swings to a loss, but revenue down less than expected. Shares in Burberry Group PLC fell sharply after the British fashion house reported a big fall in first-half same-store sales growth, amid lower spending in Asia. Philip Morris International Inc. reported a decline in profit but raised guidance for the year, as it beefs up spending on its iQOS device that heats but doesn’t burn tobacco. It said a study of Japanese consumers showed the device reduced exposure by 95% to harmful compounds released by traditional cigarettes, which release thousands of chemicals through combustion.
Blackstone Group LP swung to a third-quarter loss as whipsawing markets reduced the value of some holdings, though executives said the tumult may present investing opportunities. Citigroup Inc. turned in better-than-expected third-quarter profits despite an industrywide drop in bond trading and concerns about its international business. U.S. consumer prices fell in September, driven by the drop in gas prices, further complicating the decision for the Federal Reserve as it considers raising short-term interest rates before the end of the year. U.S. posts smallest annual budget deficit since 2007.A strengthening economy drove the nation’s budget deficit to the lowest level of Barack Obama’s presidency, but the improvement has done little to ease the latest fight over federal spending. China’s housing glut is worse than official statistics show, and the excess inventory is a drag on the world’s No. 2 economy, which is poised to report its slowest annual growth in a quarter century.
China’s banks ramped up lending more than expected in September, a sign that Beijing has had some success in its push to get more credit flowing in the world’s second-largest economy. Every weekend we select a handful of in-depth articles we think are worth a bit of your valuable time, either because they peel back the layers on a compelling business story, or somehow make us look at business in a different light. The cloud systems that Amazon.com Inc., Facebook Inc. and Google Inc. created for themselves are still trickling down to both consumers and other businesses, and there’s nothing the tech stalwarts can do to catch up. “They can offer software and hardware that works like the stuff Facebook has open-sourced. But a major restaurant group in the U.S., Union Square Hospitality Group, has announced plans to take Europe’s lead and shift to a system whereby restaurant staffs are compensated by salary. After the financial crisis, many “pubcos,” large pub-owning companies, found themselves over-extended with too much debt. “It did not take long for Britain’s property developers to realise that a pub’s ample real-estate footprint could be turned for most profit should the building be chopped up and sold on in pieces: an assortment of individual flats was best.
And rather in the manner that an ancient general might have kept a flattering portrait of his defeated rival, developers successful in their bids to convert in this way often kept the name of the lost pub for their new apartment blocks.” The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning.