The Strategist

Dell obtained permission to create a 'supermarket of business IT solutions'

08/31/2016 - 10:58

Dell Inc. said on Wednesday that it has received approval of the Chinese regulators, and now intends to complete its merger with EMC Corp. by 7 September. The deal, worth $ 60 billion, is expected to become the largest merger in the technology sector’s history.

Approval from China's Ministry of Commerce was the only remaining obstacle to the deal, which was sanctioned by shareholders of EMC on July 19th.

The new combined company, to be called Dell Technologies, intends to become a supermarket of information technology for businesses.

Dell hopes to make the combined company a chosen supplier in the rapidly growing cloud services market, where companies provide customers with software via the Internet.

Dell is going to face intense competition from Web Services division of Inc., the leader in this market. So far, Amazon Web Services has gone ahead in the cloud market. In this regard, some analysts doubt Dell's ability to compete with the service.

In an interview with The Wall Street Journal on Monday, Dell’s CEO Michael Dell said that there will be a place in the market for other competitors, especially for those which sell their products to companies who want to build their own cloud system. While some predict that much of corporate cloud computing will move to third-party systems, for example, Amazon, Dell don’t think so.

This is a new market, and there will be a lot of options, said Dell.

"There will be a growth in public cloud services, and a huge amount of cloud infrastructure, and there is a lot of service providers in addition to the large growing clouds", - he said.

The combined company will be a leading provider in terms of revenue in the world market of equipment for cloud providers, volume of which is estimated at 29 billion dollars. In 2015, Dell and EMC together controlled 18.2% of this highly fragmented market, according to International Data Corp. This market is characterized by low-margin equipment.

Dell, which is a non-public company, is buying not only EMC, but a number of partly or wholly owned subsidiaries, including cyber security company RSA Security LLC, software developer Pivotal Software Inc. and producer of software for virtualization VMware Inc. 

Previously, Dell had to attract loans totaling $ 40 billion to obtain enough funds for the deal. On the one hand, Dell got into serious debt for the transaction. On the other – that was a good time to borrow, before the US Federal Reserve announced an increase in interest rates. Moreover, these costs have to be partially recouped by schemes of settlements with EMC shareholders. Michael Dell plans to pay in cash and shares. Each share of EMC will be bought for $ 24,05 in cash and 0.111 of newly issued designated shares. The latter will be tied to quotations of one of EMC’s divisions - VMware, the developer of different software for data storage and processing centers. EMC owns 80% stake in the software developer, whose capitalization currently amounts to $ 34.3 billion. Dell intends to keep a controlling stake in VMware, however, part of the EMC-controlled assets is likely to be sold out. As for VMware itself, it will continue to be listed as an independent company.

So far, the largest IT merger has been an agreement between Avago Technologies and Broadcom, announced in May this year. The transaction’s value amounted to $ 37 billion. 


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