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Dell’s proposed $67 billion acquisition of storage giant EMC and its array of federated companies reportedly is hitting some hurdles, many of which are due to VMware’s sliding stock price since the proposed merger was first announced in October.
The deal represents the largest acquisition in tech industry history and would create a massive company that officials with both Dell and EMC hope would have the resources to challenge such vendors as IBM and Hewlett Packard Enterprise (HPE) in the competitive IT solutions and service market. Michael Dell has said that the deal will give his company the necessary scale not only in such current market segments—such as servers, storage and virtualization—but also in emerging spaces like big data, the converged data center, cloud and security.
It also would stand in sharp contrast to HP’s decision to split in two, separating its enterprise business from its PC and printer unit.
Michael Dell has spoken highly of EMC’s unique federated business model, where such companies like VMware, RSA, VCE and Pivotal operate as independent companies that work together and at times compete with each other.
However, the proposed deal has hurt the stock prices of both EMC and VMware, which has made investors in those companies nervous. VMware reportedly has seen its share price drop by as much as 30 percent since the Dell deal was announced, while EMC’s has fallen by as much as 9 percent. EMC owns 80 percent of VMware.
In addition, EMC and VMware officials two weeks after the Dell deal was announced proposed creating a company that would be based on the cloud technology EMC inherited when it acquired Virtustream in May for $1.2 billion, and that EMC and VMware would jointly own, with each getting a 50 percent share. That also appears to have been a drag on VMware’s stock.
A week after the EMC acquisition was proposed, Michael Dell wrote a post on the company blog saying that VMware will remain an independent company with a broad and varied ecosystem.
“We do not plan to do anything proprietary with VMware as regards Dell or EMC, nor place any limitations on VMware’s ability to partner with any other company,” he wrote.
Shareholders reportedly have pushed back at the both the Virtustream plan and the larger Dell acquisitions. Reuters reported last week that EMC executives are considering revamping the Virtustream idea in hopes of shoring up investor support for the Dell merger. Citing unnamed sources, the news site reported that the new plan would have EMC taking a majority stake in Virtustream and assuming its losses, giving VMware more protection. VMware officials have said that Virtustream’s losses for 2016 could be as high as $300 million.
EMC and VMware officials declined to comment to journalists, but Reuters said an announcement on the new plan could come in December.
At the same time, Re/code in a report cited unnamed sources that some EMC and VMware investors have informed Dell and EMC that there need to be some changes to the parameters of the $67 billion deal before they will consider voting for it.
The stockholders want VMware to buy back as much as $3 billion worth of VMware shares, and for VMware and EMC to undo the Virtustream plans. The shareholders also want changes to the proposed tracking shares related to VMware in order to give the tracking stock owners greater protections, according to the news site. Sources told Re/code that it was unlikely Dell and EMC would make changes to the tracking stock—which is designed to help Dell finance the deal—since that would entail revising the merger agreement.
The tracking stock has been an ongoing concern since it could help drive the tax bill up to as much as $9 billion, according to reports.
The Wall Street Journal cited a recent research report by FBR & Co. analyst Daniel Ives in which he made several suggestions for making the deal more palatable to investors, including dropping the Virtustream plan.
“In a nutshell, we believe the recent six weeks has been a wake-up call to the EMC and VMware boards,” Ives wrote, adding that Dell and EMC also could revise some of the terms of the deal, such as raising the price and ensuring less stock is tied to VMware.