Reverse takeover: VMware may buy Dell

    CNBC has announced that VMware may acquire its owner, Dell. The so-called reverse takeover procedure will allow Dell to avoid re-entering the IPO and pay part of the debts. Read more about the motives and consequences of the transaction in this material. / photo Jill CC




    Company Relations


    In 2004, storage company EMC acquired VMware for $ 625 million. And in 2015, Dell announced the purchase of EMC for $ 67 billion - this deal, according to Fortune, has become the most expensive in the history of the technology industry. And it so happened that today Dell owns 80% of VMware.

    According to IDC, in the third quarter of 2017, Dell ranked third (after Lenovo and HP) in the supply of personal computers and had a market share of 16%. Dell's annual revenue from 2014 to 2017 increased from $ 14 billion to $ 61 billion.

    For all this, VMware revenue is growing on average by a billion a year: in 2017, itamounted to 7 billion - it is 8 times less than that of Dell. Therefore, if the deal about the acquisition of Dell by VMware is confirmed, it turns out that a smaller organization will buy a larger one.

    Why does Dell need this deal


    It's all about the debts that have accumulated from Dell after the acquisition of EMC. In 2013, before the CEO of the corporation, Michael Dell privatized the company, the amount of debt was estimated at 7 billion. Now the organization owes $ 48.5 billion. Therefore, the ability to pay part of the debt is one of the reasons why the transaction can be profitable.

    If VMware buys Dell, the latter will become a public company without an IPO. According to Ilya Kundozerov, a market analyst at Morningstar Investment Service, with this development, a smaller company will be able to sell its shares and help the IT giant pay the debt.

    However, Ivan Feinseth, investment director at Tigress Financial Partners, claimsthat even in the case of the purchase of Dell and the transfer of debt VMware, the developer of software for virtualization with a cash flow of 3.5 billion dollars will not pay the full amount of the debt soon.

    Possible consequences


    According to IDC, in recent years, the global PC market has been declining by 0.5% annually: it has been squeezed out by the smartphone and tablet market. In such circumstances, server technology remains the hope for Dell, work with which in November last year brought the company $ 56 billion in net income. However, Dell's operating expenses rose sharply from 10 to 17 billion, resulting in an operating loss of $ 3 billion.

    The Register believes that after the deal, Dell will have enough resources to enter the cloud technology market. Thanks to its hyper-scalable servers and support for VMware, Virtustream, Pivotal and Boomi, the corporation will be able to leave behind its competitor - HPE.

    Bloomberg also convincedthat reverse takeover will benefit both Dell and VMware customers. Collaborative products and solutions will help end users reduce costs by tighter integration of virtualization solutions with server technologies.


    / photo Jerry Luo CC

    Other options


    According to Bloomberg, an alternative for Dell could be the sale of shares on an IPO without changing relations with VMware. Due to this, you can attract additional capital from the outside. This happened to Alibaba: its shares jumped 38% on the first day of trading on the New York Stock Exchange. But this is rather a rarity, therefore, with such a development of events, the risks for the organization will be significant, because an independent Dell without merging with VMware is less attractive to investors (because of debts).

    Another option : Dell buys the remaining share of VMware (20% stake). According toBarclays analysts, the value of the transaction would be from 12.1 to 12.6 billion dollars. Then the joint organization is transformed from private to public and issues shares on the market. Feynset claims that such a move will produce $ 30 billion for the corporation. However, Barclays analysts warn that this is not the best option for a company that is trying to pay debts. Because to buy VMware you will need to borrow more money.

    According to anonymous insiders, the Dell Board of Directors will discuss in detail all options, including reverse takeover, for a month.



    What is reverse takeover: definition on the Wiki and more on Investopedia .



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