EMC Profit Declines as Merger Costs, Dollar Weigh on Results

By Robert McMillan 

EMC Corp.'s chief executive expects Dell Inc.'s landmark acquisition of his company to be completed by October, even as worries over the deal--and the technology sector in general--have reduced the value of Dell's offer by $9 billion.

"I think it's really fair to say that this environment has not been kind to any security," said EMC Chief Executive Joe Tucci in a conference call with investors Wednesday. "We are highly confident in the contractual terms we have in place."

The tie-up, in addition to being the largest tech deal in history, is extraordinarily complex. Dell, which is privately held, aims to buy not only EMC but its Byzantine federation of wholly and partially owned subsidiaries, including RSA Security LLC, Pivotal Software Inc., VMware Inc. and others.

But a series of missteps since the deal was announced have hammered the share price of VMware, widely regarded as the federation's crown jewel, and subsequently lowered the payout that EMC shareholders can expect if the deal goes through.

Dell is offering EMC shareholders $24.05 a share plus a tracking stock--essentially in Dell's parent company Denali Holding Inc.--valued at 0.111 times the value of VMware's shares, which closed at $44.44 on Wednesday.

The same day, after EMC reported earnings for its most recent quarter, EMC shares slid below $24.05 for the first time since the tie-up was announced in October 2015. That puts the total value of Dell's offer below $58 billion, or $9 billion less than its October tally.

Beyond the deal's complexity, investors are worried that uncertainty in the tech sector will hamper Dell's efforts to spin off assets and reduce the debt it expects to take on to complete the transaction.

"The market is kind of saying that there is a real probability that the deal won't go through," said Toni Sacconaghi, an analyst with Sanford Bernstein. Mr. Sacconaghi, like other analyst and observers interviewed by The Wall Street Journal this week, considers that a remote possibility. He gives the acquisition an 80% chance of success.

Daniel Ives, an equity analyst with FBR & Co., believes that VMware's poor performance could prompt Dell to improve its cash offer ahead of a shareholder vote, expected by early May. "We still believe the deal will get consummated, but I'm of the opinion that there are going to be some tweaks to the deal terms," he said.

The contractual terms Mr. Tucci alluded to in his Wednesday call add up to a stiff penalty if EMC or Dell walk away from the transaction. EMC would pay $2.5 billion to terminate the deal; Dell's parent Denali would be out $4 billion.

Dell's current offer totals just under $29 a share including the tracking stock. That is more than the $26 EMC was trading at in October, even factoring in a discount for the tracking stock, and it is far above the roughly $20 price that analysts such as Mr. Sacconaghi believe EMC likely would command if not for Dell's offer.

In October, Dell's offer was valued at more than $33 a share. "Given what has happened to the tracking stock, it's significantly below that," said Mr. Ives. "But it's a different market than what it was in October."

EMC, based in Hopkinton, Mass., sells high-price data-storage systems to corporate customers, and that business has taken a drubbing as information technology managers seek lower-cost alternatives including cloud-computing services sold by companies such as Amazon.com Inc.

On Wednesday, EMC reported quarterly revenue down 0.5% year on year, totaling $7.01 billion, and profit of 65 cents a share, excluding merger-related costs.

Analysts had expected revenue of $7.12 billion and profit of 65 cents a share.

EMC, Like many U.S. companies that sell to overseas customers, has been hurt by a strong dollar, which makes its products more expensive in international markets. Excluding the effects of currency, revenues would have been 3% higher than year-ago numbers, EMC said.

Write to Robert McMillan at [e-mail]

(END) Dow Jones Newswires

January 27, 2016 19:55 ET (00:55 GMT)

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