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EMC Reports Q4 as Anxiety Rises About Dell Buyout

Cooling debt markets and declining share prices are fanning worries that Dell's plan to buy out EMC might run aground.


Shareholders of the data storage company EMC will get an update on the company’s plans to sell itself to privately held Dell on Wednesday morning when it reports the results of its fiscal fourth quarter.

If nothing else, EMC’s report will remind its shareholders how they lucked out last fall when Dell offered to acquire the company in a deal worth $67 billion. As of Friday’s close, EMC was worth about $20 billion less than that. Since then, the shares of both EMC and its software subsidiary VMware have fallen: EMC by 13 percent and VMware by more than 38 percent.

That fact, coupled with intensifying anxieties about the state of the corporate debt markets, has triggered some concerns that Dell’s takeover plan, which hinges on raising more than $40 billion in debt, might run into trouble.

With the promise of $24.05 a share in cash plus new tracking shares linked to VMware, there’s no reason to expect that EMC shareholders will vote down the deal, even though some shareholders have hinted they might do just that. Even so, EMC shares traded below $24 a share on two consecutive days last week.

In the end, most people expect the deal to close by sometime this fall, but that doesn’t mean there aren’t worries in the marketplace that it won’t.

“When EMC trades below $24, it says the market believes there’s only a 50-50 chance the deal goes through,” said Toni Sacconaghi, an analyst with Bernstein Research, in an interview with Re/code. Dell’s plan calls for it to raise about $49 billion in debt. “People are worried about where the high-yield debt markets are going,” he said.

Investor appetite for corporate debt has decreased in recent months. The consortium of banks led by J.P. Morgan Chase has guaranteed Dell’s financing and negotiated unusually high rates of as much as 12 percent on certain portions of it as a key concession.

Debt markets have recently turned so sour on debt issues intended to fund corporate acquisitions that some deals have been renegotiated. The Carlyle Group renegotiated the terms of its deal with Symantec to buy its storage unit Veritas by trimming the overall price and reducing its reliance on debt.

Sacconaghi still expects Dell and Silver Lake to close the transaction as they’ve proposed — Dell’s breakup fees are huge — but there are still some potential, if remote, risks to the deal.

For one thing, EMC’s overall business has been declining over the last year, and its revenue has missed the expectations of analysts in each of its last four quarters. Analysts surveyed by Thomson Reuters expect EMC to post earnings of 68 cents a share on revenue of $7.1 billion.

Another quarterly miss might lead debt investors to conclude that once Dell and EMC are combined, “the expected earnings and cash flow are likely to be lower than when the deal assumptions were put together.” Dell’s own slowing business, which is still heavily exposed to the declining PC market, combined with a weakening environment for IT spending overall, hasn’t helped.

That raises the possibility — though Sacconaghi concedes it’s remote — that Dell and the banks “might come to the collective conclusion that this isn’t the right thing to do.” The debt markets would have to “get really ugly” first, he says.

There’s no hint of that so far. As recently as Friday, Dell CEO Michael Dell signaled his eagerness to close as quickly as possible, according to a transcript of a video presentation to EMC employees: “We’d certainly like it to happen sooner rather than later. We’re going as fast as we can.”

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