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Dell Is Offering EMC $27.25 a Share in Cash Plus Special VMware Stock

Also could include some shares in VMware.

David Paul Morris, Slaven Vlasic / Getty

Dell is offering $27.25 a share in cash to buy out EMC, according to sources briefed on the negotiations. Shareholders would also get a specialized stock in cloud software company VMware as part of the deal. CNBC’s David Faber earlier reported the value of the transaction would be “worth at least $30 a share,” without citing a precise cash figure.

The offer represents a $50 billion-plus takeover attempt by Dell, which would stand as the largest tech deal of all time. Dell, led by CEO Michael Dell, has been negotiating with a consortium of banks to raise financing, including J.P. Morgan, Bank of America and Credit Suisse, as well as Silver Lake, the private equity firm that owns part of the company.

CEO Michael Dell was in New York today meeting with bank executives, including J.P. Morgan CEO Jamie Dimon, sources briefed on the process of the deal tell Re/code.

In addition to the cash offer of $27.25 a share, Dell would give investors what’s known as a tracking stock in VMware, the cloud software company that’s 80 percent owned by EMC. That stock would “track” the value of the remaining 20 percent of VMware that openly trades. Together that would bring the per-share value above $30, according to sources.

The $27.25 bid is also somewhat higher than the average price paid by Elliott Management, the activist hedge fund that has been pressuring EMC’s board to sell off assets and shake up its management. Elliott currently owns 2 percent of EMC.

Here’s how the financing could work. Dell is asking the banks to make a series of bridge loans that would then be converted into high-yield bonds. Those bonds could later be exchanged for equity in the combined company. The banks are studying the feasibility of the plan, according to sources.

An important factor centers on whether or not the the U.S. Federal Reserve seeks to raise interest rates in the coming months. If it raises rates, as many analysts expect, the proposed Dell-EMC bonds would be less attractive and the cost of financing the debt would rise, adding potential risk to the deal.

Another element to the deal involves VMware, which is “considered the crown jewel of the federation and Michael wants to hold on to it,” as one source put it, suggesting Dell would retain a majority stake in VMware even after redistributing some of its shares. CNBC’s Faber reported Friday that the deal may include issuing tracking stock in VMware.

Deal negotiations have been conducted directly between Michael Dell, the founder and CEO of the PC company he started in a college dorm room in 1984, and Joe Tucci, EMC’s CEO since 2001 and the architect of its federation structure. The process began in late July or early August, sources said.

During that period, EMC asked for an extension to the standstill agreement that has been in force between it and Elliott Management since earlier this year. The agreement formally expired on Sept. 1. Elliott never responded to EMC’s request, but EMC proceeded to negotiate with Dell anyway, according to sources. The company will report quarterly earnings on Oct. 21.

Both CEOs see a potential combination as a means of guarding their legacies.

Dell rose to dominate the PC industry in the late 1990s and has been working to transform itself into an enterprise services company, offering IT products to corporate customers. EMC has also looked to change its fortunes, shifting its focus from hardware and software services to corporate clients to cloud-based services. It acquired VMware in 2003, paying $625 million for what was then a startup whose software emerged as one of the driving forces in the revolution in cloud computing.

EMC has been studying a range of strategic options for more than a year. One of those options involved an unusual transaction under which it would have engineered a downstream merger led by VMware. It also sought to sell itself to Hewlett-Packard in an all-stock merger, but the talks fell apart over price, sources said at the time.

Spokespeople for Dell, Silver Lake, EMC, VMware and Elliott all declined to comment.

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