When EMC and Dell announced their $67 billion deal in October, there was an interesting provision in the agreement — language that allowed EMC to continue shopping for a better deal. This ‘Go Shop’ clause expired last night.
The likelihood that anyone was ever going to step up and give EMC more than the $67 billion it negotiated with Dell was always remote at best, and the Massachusetts storage giant announced in a statement last night that it had received no credible offers.
“No acquisition proposals were received or deemed to constitute a superior proposal to the existing merger agreement,” the statement read. That means that the merger will now proceed and should be completed some time between May and October of next year.
There had been some speculation that perhaps another company like Oracle or Lenovo might come forward and make a better offer, but that seems to have never happened. Oracle CEO Larry Ellison praised the deal profusely, and said his company would have put together a bid, but it was otherwise occupied putting its energy and resources into its cloud strategy, according to a BusinessInsider article.
In spite of Ellison’s reported optimism, this merger still faces major hurdles to get to completion. It’s an elaborate deal involving lots of pieces with two large organizations trying to come together. It is further complicated by several financial factors.
For starters, Dell had to secure more than $40 billion in debt to finance this deal. With that kind of debt load, it’s highly likely it will start selling some parts of its own company, sell pieces of EMC or both to help pay off some off some of those borrowed funds.
In addition, the deal is predicated on a concept called tracking stock. While EMC owns an 80 percent stake in VMware, the company is a separately traded company. CEO Michael Dell wrote a blog post shortly after the deal was announced, assuring customers and shareholders that will not change after the merger.
The problem is that VMware’s stock price has had a a precipitous drop since the deal was announced from a high of $72.27 on the day the deal was announced to $59.05 at the close on Friday. This matters because, while Dell has agreed to pay EMC shareholders a fixed rate of $24.05 per share, it will pay for the rest of the $9.10/share due with EMC shares of VMware stock that track against the share price of VMware. With a big drop in VMware’s share price, the stock is less valuable and it puts this provision into question.
Then there is the matter of Virtustream, the cloud company created jointly by EMC and VMware after the deal was announced. The move added a new wrinkle to the merger, at least in part because VMware shareholders didn’t seem to like the provision that, even though EMC and VMware split ownership, the new company’s balance sheet would sit on VMware’s books.
Finally, there is an on-going debate about how the IRS will tax these tracking shares. Some say there is no tax, while others believe it could result in a hefty $9 billion tax bill.
While the Go Shop provision hung over this deal, it is not the only issue it faces. As of today at least there will be no mystery buyer swooping in to undercut Dell, but clearly there are challenges ahead as the two companies try to bring this merger to completion in 2016.
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