Dell Wants EMC So It Can Gain Control of VMware

Advanced talks between Dell and its backer Silver Lake Partners to acquire storage giant EMC for $50 billion would be the largest in the tech industry and potentially one of the largest leveraged buyouts of a public company. It also appears that Dell's primary interest in EMC is to take control over virtualizations giant VMware, which EMC now holds an 83 percent stake in.

The two companies have reportedly been negotiating a combination for several months and such a deal would involve a huge amount of debt -- $40 billion on top of the $11 billion that Dell now has on the books for its own leveraged buyout in 2013. According to CNBC the two companies are looking to tap the high-yield bond markets to finance the deal. The talks were first reported late yesterday by The Wall Street Journal, which said a deal could come together within a week, though it could also fall apart. The initial report indicated that EMC would want to spin off VMware but CNBC is reporting that Dell wants control over the company. "I know that Dell wants to maintain control over VMware," said CNBC reporter David Faber. "While there might be more sold into the public market, it would not be a wholesale sale of the VMware stake or a spin to shareholders or anything like that. Key to the reason Dell wants to own this is to also control VMware now."

While the reporting is still speculative at this point and neither company has commented, CNBC is reporting that there's a strong possibility that a deal could come together. EMC and VMware have been under pressure for some time by Elliott Management, an activist investor with a track record of forcing change on companies, to find new ways to generate shareholder value. Adding fuel to speculation that EMC will do something is the fact that longtime Chairman and CEO Joe Tucci has announced he will retire next year. EMC, the largest provider of enterprise storage, remains under huge competitive pressure from upstarts with lower cost gear and a growing shift toward cloud storage.

Hewlett Packard earlier this year reportedly was in talks to acquire longtime rival EMC as well. Both companies are under pressure to move beyond their core portfolios of hardware as enterprises move more workloads to cloud providers. HP appears to be a less likely candidate to jump into any bidding given it's in the process of splitting into two companies, which will finalize next month.

Dell and EMC have a storied history. When Dell first started expanding beyond its core PC business, it had a reseller agreement with EMC, which later fell apart when Dell started acquiring storage companies such as EqualLogic and Compellent Technologies, among others.

Naturally Dell taking control of EMC and VMware would have implications on its relationship with Microsoft. While Dell and Microsoft are close partners -- both among their software and hardware businesses -- VMware and Microsoft are key competitors, though they did announce a partnership at the recent VMworld show in San Francisco where the two are working together to support Windows 10 deployments using AirWatch. In addition to having rival virtual machine platforms, VMware is making a big push in mobility management with its AirWatch unit and its vCloud Air public cloud, which competes with Microsoft Azure. At this point the former doesn't appear to be a threat.

Posted by Jeffrey Schwartz on 10/08/2015 at 7:51 AM