EMC Profit Declines as Merger Costs, Dollar Weigh on Results
January 27 2016 - 8:10PM
Dow Jones News
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 Robert.Mcmillan@wsj.com
(END) Dow Jones Newswires
January 27, 2016 19:55 ET (00:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Global X Funds (NYSE:EMC)
Historical Stock Chart
From Mar 2024 to Apr 2024
Global X Funds (NYSE:EMC)
Historical Stock Chart
From Apr 2023 to Apr 2024