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'Significant Uncertainty' Surrounds Dell-EMC Deal

A Wells Fargo analyst cuts his rating on EMC citing potential hurdles to its proposed acquisition by Dell.

Justin Sullivan / Getty

There are a lot of moving and complex parts to Dell’s $67 billion proposal to acquire the data storage company EMC — so many that analyst Maynard Um of Wells Fargo wonders if the deal will ever get closed at all.

In a note to clients today, Um downgraded shares of EMC to “market perform” from “outperform” and lowered his target price range on its shares. “The complexity of this deal and the measurement of the outcomes makes this event challenging and we fear disruption, in the interim, could have an adverse impact on business,” he writes.

Um cited Re/code’s report from Tuesday concerning the potential that a tax bill of as much as $9 billion could complicate or even derail the deal as adding a new wrinkle of uncertainty to the deal.

But Um’s biggest question concerns how to value the tracking stock that Dell has proposed to issue in order to help finance the deal. Dell has proposed to give EMC shareholders tracking shares linked to VMware in addition to cash in order to buy them out.

Um writes that he’s had a “significant challenge” in figuring out how to value the proposed tracking shares. “We find it difficult to come to a definitive value for the tracking stock, and thus struggle to value this as the best proposed deal for shareholders,” he writes. “Until there is better clarity to the value of the tracking stock and/or deal closing, we believe it prudent to lower our rating” on EMC.

Dell, a privately held company, last month proposed to acquire EMC and its stake in VMware in what has amounted to the largest tech M&A deal ever. Dell has proposed giving EMC shareholders 0.111 shares of new tracking stock linked to EMC’s software subsidiary VMware in addition to cash in order to help pay for the massive purchase. The cash would come from about $40 billion in new debt. EMC owns 81 percent of VMware while 19 percent of its equity trades on the New York Stock Exchange. VMware shares have declined by about 25 percent in the month since the deal was announced.

Um lowered his price target on EMC shares to a range of $25 to $28 a share from $29 to $30 a share previously. EMC shares rose more than 1 percent to $25.55 by midday; VMware shares fell 2 percent to $59.27.

This article originally appeared on Recode.net.