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Michael Dell Explains His $67 Billion Bet on EMC

Dell sits down to explain the inexplicable.

Dell

Big corporate mergers almost never work.

Consider the sheer complexity of the company that will result from the combination of computing giant Dell Inc. and the data storage company EMC, and it’s hard to imagine how many of the pieces will fall in place. Corporate cultures may not mix, customers may defect to competitors, executives may leave and take institutional knowledge with them. A 1999 KPMG study estimated some 83 percent of deals failed to boost shareholder value.

But Michael Dell is unfazed by history or data.

“We’ve spent a lot of time studying this, and we think we know everything that could go wrong, and we think we’ve taken steps to guard against those things,” he said.

A day ahead of the start of a company conference, Dell, the man, sat down for an interview with Re/code in a hotel conference room in Austin, Texas, and talked about how Dell, the company, will combine with EMC in a transaction worth about $67 billion employing a strategy that made its target vulnerable to hostile shareholder attack.

When the deal closes — make that if it closes — Dell will have pulled off the single largest M&A deal the technology marketplace has ever seen, one that will result in the biggest single vendor of personal computers, servers, software and storage equipment in the world.

In so doing Dell will go against current conventional logic that calls for simpler corporate structures. Companies like HP and Symantec and eBay have joined a long list of American corporations that have split up to untangle complicated conglomerate structures and focus on growing markets. Ironically, EMC’s path to a sale was reached because its complicated structure made it vulnerable to hostile shareholders demanding a split.

At 50 he is eager to prove that the classic Big Co structure still works. Dell thinks a new bigger Dell stands a chance at survival away from the hot glare of the public markets. It will continue to operate privately as it has since the 2013 leveraged buyout of his company. “When you think about running a company over the long term, there are things you can do as a private company that you can’t do when you have to work under the restrictions of the 90-day shot clock,” Dell said, revisiting a basketball metaphor he’s used before. Dell will have to answer only to himself, his co-owners at the private equity firm Silver Lake, the debt markets and a little bit to VMware shareholders.

The strategy, which came as a surprise to Wall Street, is far from a surprise in Dell’s telling. The buyout hews closely to the vision he sketched back in 2013 when he first proposed to go private: Invest heavily in enterprise technology and break the company’s reliance on the slackening demand for personal computers, which as of today still account for roughly half of Dell’s business. He did not address — and the company declined to comment on — a Re/code report that Dell investor Silver Lake explored getting rid of the PC division just a week before announcing the EMC deal.

Post-deal, assuming about $80 billion in combined revenue, personal computing at Dell will account for about 30 percent of sales. Much of the new company’s potential for success will depend not only on its sheer size, but on its ability to deliver a wide range of IT products ranging from the PC all the way up to industrial-grade storage gear and software to make it all run more efficiently.

Earlier in the day at a press conference, Dell had argued that the IT marketplace wants fewer vendors, not more, and that a link to personal computing is crucial to achieving the necessary scale to become the one company that can supply most of a customer’s technology gear. “When you look at the IT industry, the companies that have succeeded in the volume data center business have been attached to the PC side of the business,” he explained to an international press corps still wrapping its head around the massive deal.

That argument sounded a lot like the one Hewlett-Packard’s CEO Meg Whitman used from 2011 until late 2014 to defend her decision to keep HP in one piece despite considerable pressure to split up, a process her predecessor Léo Apotheker initiated but which she unwound. HP’s scale allowed it to negotiate effectively with suppliers and to approach customers with a full range of products to suit nearly every computing need, Whitman argued consistently over the years until her views suddenly changed.

She now contends that the two new companies are in completely different businesses and will be better apart than together. Oddly, HP reached this conclusion after it tried but failed to buy EMC in 2014. At the time, the EMC CEO insisted that to consummate the deal, HP would have to get rid of its PC and printer division. The deal fell apart over price. But the talks convinced HP to revisit the idea of splitting. The declining PCs and printers business dragged down the faster-growing enterprise business. HP will complete its split on Nov. 1.

Making Dell, which generates an estimated $56 billion in annual revenue, bigger is no easy feat. Dell struggled to grow the enterprise side of its business in part because there aren’t many large enterprise tech companies worth buying. It is big enough that for an acquisition to make a financial dent it has to be really big. And usually when a big company is for sale, it means trouble. “Buying a company that is number one in its business is hard to do,” he said. “When something is for sale it’s often not a leader.”

EMC is different, he argues. It has a lot of market leaders under its corporate roof. It’s the leader in traditional storage gear and owns two players in the up-and-coming business of flash memory storage, XtremeIO and ScaleIO. It owns VCE, the leader in a new category of IT gear known by the unsexy phrase “converged infrastructure” that packs computing, storage and networking into a single self-contained device. It owns 81 percent of VMware, the world leader in virtualization software, which is used to make one computer act like many, making data centers more efficient. VMware in turn owns Airwatch, which helps companies deploy and secure mobile devices.

All of these are things that big companies buy when they’re building up data centers or swapping out the old IT gear and services for new ones. And having that mix of current technology and things that are a bit more on the leading edge is another strength of the deal, Dell says.

EMC also has Pivotal, a young company it owns in a joint venture with GE. Pivotal combines technology for analyzing massive collections of data — known as data lakes — to generate money-making or money-saving insights. Eventually EMC CEO Joe Tucci had planned to float a minority stake of Pivotal’s shares on the public market, repeating the play he ran with VMware more than a decade ago. Dell says he’s on board with taking Pivotal public. “That’s the path that Pivotal has been on, and I agree with that path,” he said. “I intend to stay on that path.”

The federation structure that Tucci stitched together through a hodge-podge of acquisitions over the course of 14 years — the very federation which the activist hedge fund Elliott Management demanded be dismantled — will get even bigger and more complex under Michael Dell. Where EMC was a federation of four or five companies, Dell will be a super-federation, with many more pieces. Well before the deal completes, two new divisions are already branching off.

Secureworks, a Dell-owned security outfit, filed confidentially for an IPO under the JOBS Act, according to a Wall Street Journal report. The plan apparently calls for Dell to float a minority stake in Secureworks, just like EMC did with VMware in 2007.

Another new piece was created by VMware and EMC on Tuesday: Virtustream, a company selling hybrid-cloud computing technology which EMC bought earlier this year for $1.2 billion. Tuesday, EMC and VMware created a new Virtustream company and said that each of them will own half of it, thereby creating yet another piece of the EMC federation. Dell says he supports the Virtustream plan.

In fact, Dell is a big fan of EMC’s “company of companies” federation, which made it vulnerable to an attack by hedge fund Elliott Management. EMC CEO “Joe Tucci discovered something which we have also discovered. You don’t achieve the success you want just smashing them all together,” Dell said. He cites Dell’s 2011 acquisition of Secureworks as an example of a similar strategy. “When we acquired Secureworks, if we had taken it and made all the salespeople into Dell salespeople we would have totally destroyed Secureworks,” he said. “Instead it remained Secureworks, but with capital from Dell and access to Dell’s customers. And now it’s a great business.”

EMC didn’t just “smash things together” when it acquired VMware in 2003 either, and before the deal was announced it was worth more than $34 billion. Yet this complexity in structure is one reason why the acquisition by Dell could be derailed. A key portion of Dell’s ability to pay for EMC comes from its complex proposal to create a tracking stock for VMware. EMC shareholders will get $24.05 in cash plus a fractional share of VMware tracking stock for every share of EMC they own. VMware shareholders hate it: In August, its shares traded at north of $90 a share. Today they traded for less than $56.

At least one shareholder lawsuit filed last week against EMC focuses on this decline, specifically accusing EMC of structuring the deal to “shelter Dell from a multi-billion-dollar tax burden and to reward EMC insiders.”

The tracking stock is one of dozens of moving parts to a deal that appears to be spawning more moving parts by the day.

Of the biggest challenge of his career, Dell says, “This is really fun. I don’t know what could be any more fun than doing what we’re doing right now.”

This article originally appeared on Recode.net.