By now, you must have probably heard that the Dell board is supposed to be assembling later this January to figure out how it might reorganize itself to deal with the pile of debt it took on when it acquired EMC in 2015 for 67 billion dollars. Investors in Dell stock naturally will be following this story with great interest.
The speculations began on Friday, and involved a couple of likely scenarios, as well as Dell going public or buying VMware (which I don’t think solves the debt problem). Today, CNBC reported a third alternative that the company could be thinking of a reverse merger where VMware buys Dell.
For what it’s worth, I got in touch with Dell on Friday and was told, as you would expect, that Dell does not respond to hearsay. But one industry insider I spoke with did say this: the company is actually taking all options into consideration, but has not decided anything yet.
The company still purportedly has 46 billion dollars in debt left over from the EMC merger, and as Bloomberg’s Kiel Porter noted, that amounts to 2 billion dollars in interest payments. Under the new tax law, they’ll need to pay considerably more because they lose part of the interest write-off. The interest figure looming in the future is almost certainly what is precipitating this discussion by the Dell board now.
When the deal closed in 2016, the question was how the firm would deal with all of that debt. The view at the time was that the company would sell out some of the EMC pieces. It did ditch its own software division in July 2016 for 2 billion dollars to Francisco Partners and Elliott Management. It also jettisoned Documentum, the content management company EMC had bought back in 2003 for 1.7 billion dollars, selling out to rival OpenText for an unrevealed price in January 2017. Amazingly, it has kept much of the EMC federation together.
One thought at the time was that Dell, which owns a preponderance stake in VMware, would sell part of those holdings, while still maintaining more than 50% of the stock. It is worth noting that VMware is sold on the stock market as an independent company. That never happened and now we see Dell may in fact want to buy out the rest, or have itself submerged by VMware, which is a smaller company.
It’s imperative to temper all of this because these are just hearsay right now. Michael Dell and his financial backers at Silver Lake Partners have shown that they aren’t afraid of making bold moves. The debt could be the drive for making such a move. So do not be surprised if the company ends up executing on one of these alternatives, or something else that has not reached the rumor mill yet.