Firms Reportedly Are Bidding for Dell's Quest, SonicWall Units

Selling the software, security and services businesses would help Dell reduce the debt it will take on when it buys EMC for $67 billion.

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Dell reportedly is fielding bids from several firms for its Quest and SonicWall businesses and is shopping its services unit as the tech vendor looks to reduce the debt it will take on when it buys storage giant EMC for $67 billion.

Citing unnamed sources, Reuters is reporting that three buyout firms—KKR & Co., Thoma Bravo and Vista Equity Partners Management—are all bidding to buy the Quest and SonicWall businesses, which combined are valued at about $4 billion. Quest has helped shape Dell's IT management software portfolio since it was bought for $2.4 billion in 2012. Dell bought SonicWall for its network security technology in 2012.

At the same time, Dell is working with Citigroup to sell its IT services business, according to Reuters. The services business is based on the company's $3.9 billion acquisition in 2009 of Perot Systems in a move designed to enable Dell to better compete with the likes of Hewlett-Packard and IBM. The services unit is valued at $5 billion to $6 billion, and Dell is looking to sell it to large services companies in the United States and other countries, according to the sources.

Reports of Dell's interest in selling some of its assets first emerged in early November, about a month after CEO Michael Dell announced that his company planned to buy EMC and its various businesses—including VMware, RSA, VCE and Pivotal—for $67 billion, the largest deal in the history of the tech industry. Dell officials have said that the company will take on as much as $49.5 billion in debt to buy EMC, and the sale of the businesses would help reduce the debt. They also said they will spend the first two years after the acquisition focused on reducing the debt.

The deal, which is expected to close in October 2016, was announced two years after Michael Dell—with Silver Lake Partners—successfully bought his namesake company for almost $25 billion and took it private.

The controversial deal is part of Michael Dell's larger effort to make his company among the world's largest enterprise IT solutions and services vendors, and having EMC in the fold would give Dell greater capabilities in such areas as data storage, cloud computing and virtualization. It also would give the company better access to larger enterprises, complementing Dell's strength in small and midsize companies (SMBs).

The deal still needs the approval from EMC shareholders, and both Dell and EMC are making moves to make it more palatable. Investors are nervous because VMware's stock price has dropped by almost 30 percent since the deal was announced, and EMC's also has fallen.

Neither was helped when EMC and VMware officials two weeks later announced they planned to create a company based on the cloud technology EMC inherited when it acquired Virtustream in May for $1.2 billion. The officials said EMC and VMware would jointly own the company, with each getting a 50 percent share. EMC owns about 80 percent of VMware, which is one of a number of companies that make up EMC's unique federated business model.

EMC and VMware officials now reportedly are considering changing the Virtustream proposal, with EMC taking a majority stake in the new company—which would be called Virtustream—and assuming its losses. In addition, some EMC and VMware shareholders reportedly want changes made to the Dell bid before they will vote for it, including changes to the proposed tracking shares related to VMware in order to give the tracking stock owners greater protections.

The tracking share plan—designed to help Dell finance the deal—also may drive up the tax bill on the deal to as much as $9 billion, which reportedly is causing concern among Dell executives.