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Dell-EMC Acquisition Deal: How is the Debt Being Financed?

As the EMC Corp. EMC - Dell merger approaches, the two entities are preparing to make the transition smooth in all possible ways, right from integration to debt handling.

Dell will have to shoulder a debt of $50 billion (it was termed as the largest ever tech acquisition at $67 billion) to get this deal done. The deal is expected to close in the Jun- Oct 2016 period.

Financing Details

In order to lessen their debt burden, both EMC and Dell are looking to divest certain non-core businesses.

Per media reports, EMC is seeking to raise about $6 billion by selling off its Documentum business, while Dell is hoping to get another $4 billion from the divestment of its Sonicwall and Quest businesses. Dell has already signed a $3 billion agreement with NTT Data Corp. to divest Dell Services, its information-technology services division. According to some reports, Dell is also planning to spin off its SecureWorks cybersecurity unit.

Even after these divestures, Dell will still have to pay off a big debt. This makes us wonder why the company is going to such great lengths to acquire EMC assets.

Why EMC and Dell are Going to Such Great Lengths?

If we look closely at Dell’s financial position (it had to disclose the details last year), we can clearly see that most of its businesses (except Enterprise) have been going downhill for a while. Further, Dell, at present, has high stakes in the flagging PC market.

As such, EMC is a good bet as the company is likely to post a turnaround even if the risks associated are quite high. This is because EMC already has a strong product base and it is also well positioned in the cloud computing and Big Data domain. Furthermore, this acquisition will allow Dell to have significant controlover EMC’s most prized division- VMware, Inc. VMW. On the other hand, this deal seems to be a positive for EMC considering that its core data storage business has been struggling for a while due to growing competition from flash storage peers.

Bottom Line

While there is hope for a better growth trajectory for the combined entity, the risks involved in integrating two large companies is huge and that too with a massive debt burden.

In such a scenario, reducing debt leverage by means of doing away with non-core assets does seem like a reasonable thing to do.

Despite the efforts to lessen debt, it seems that EMC investors are not impressed as shares plunged around 1.5% in yesterday’s trading. But a more likely theory for this decline could be that investors being optimistic about EMC are selling off now to book profit with short options at the time of the merger, when shares are likely to go up.

At present, EMC is a Zacks Rank #3 (Hold) stock. A couple of better-ranked stocks in the same space are Progress Software Corporation PRGS and Qumu Corporation QUMU, each sporting a Zacks Rank #1 (Strong Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
EMC CORP -MASS (EMC): Free Stock Analysis Report
QUMU CORP (QUMU): Free Stock Analysis Report
VMWARE INC-A (VMW): Free Stock Analysis Report
PROGRESS SOFTWA (PRGS): Free Stock Analysis Report
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