In-depth study of Dell EMC Merger including the industry dynamics, merger complexities, synergy creation, Deal Design and history, terms of transaction and impact of externalities

1. Kshipra Dwivedi, MDI Gurgaon
Dell’s Acquisition of EMC

2. Industry Dynamics: Computer
Storage & Hardware
• Highly dependent on the
microchip industry
• Highly concentrated market with
few major players
• Enterprise level deals are big in
nature & sales cycle typically
varies from few months to a year
• Small retailers and end consumers
are price sensitive
• Entry Barriers are high as this is
a highly specialized industry and
requires high capital investment
Major Challenges - Declining PC
Market and Challenges from cloud
services like AWS
EMC was looking for an acquisition because:
• To retain its federation model, a relief from shareholder activism was
needed
• Overcome slow revenue growth due to commoditization of computing
hardware.
Dell was looking for EMC’s acquisition because:
• Revenue Synergies - Dell specializes in serving small and midsized
customers and EMC in serving enterprise customers - combined company
will have a broader menu of services to offer and a greater customer reach,
which will generate significant cash flows
• Expand into fast-growing markets such as hybrid cloud, converged
infrastructure, and software defined data centers
Portfolio Expansion and scaling up
Reinvigorating the Storage Business
Focus on Long term growth and
Innovation
Create the best in class GTM model

3. • Reverse triangular merger was adopted – Dell created a subsidiary, which purchased
EMC. This subsidiary was then absorbed by Dell
• EMC was fully absorbed in Dell, while VMWare was integrated in a different
fashion altogether.
• Deal Size - $65 Billion
• Premium Paid - EMC shareholders were paid a total of $33.19 per share, a premium
of 28% above the EMC’s closing price on October 7, 2015.
• A tracking stock is issued by parent company that tracks the financial performance
of a particular division. Tracking stocks trade in the open market separately from the
parent company's stock
• Deal was financed partly by cash and a part in stock - Dell paid $24.05 per share
in cash for all 1.957 billion shares, along with providing 0.11146 tracking stock
in VMware for each EMC share
Deal Structure
Value (Billion)
Cash Required
$
47.07
Instrument Value (in Billions)
Reduction in Cash in Books 4.148
-Selling of IT services division (NTT Data Corp) 3
-Sale of Stock in SecureWorks 0.112
-Reduction of Cash/Securities 1.036
Debt Raised 43
3 Year A-1 Term Loan 3.5
5 Year A-2 Term Loan 3.5
5 Year revolver Loan 3
Seven Year Term-B loan 8
Senior Secured Notes 16
Senior Unsecured Notes 9
Equity Funding 4.5
Total Money Raised 51.648

4. Handling VMWare
• Why Tracking Stock Structure?
o Allowed Dell to avoid a tax bill that could have topped $10 billion
o Kept the underlying ownership structure intact; benefit from full consolidation of VMware’s results
• EMC owned 81% of VMware, which equaled 343mn VMW shares
• Approximately 120mn VMware shares were retained by Dell for 28% VMware economic interest
• Approximately 223mn VMware tracking stock shares, representing 53% VMware economic interest, were issued to
EMC shareholders
• When the deal would be complete, Dell will have full operational control of VMware with 97% voting rights (due
to VMware’s dual-class stock thanks to EMC), even though it will directly own only a 28% economic interest
• Existing VMware public shareholders will retain the 19% VMware ownership they owned before the deal, along
with their current 3% voting rights
• Overseeing the new VMware tracking stock would be the Dell Board and a three-person “Capital Stock
Committee” that will be composed of at least two independent members

5. Reactions to the Deal
"Our new company will be exceptionally well-positioned for growth in the most strategic areas of next generation IT, including digital
transformation, software-defined data centre, converged infrastructure, hybrid cloud, mobile and security”
-Michael Dell (announcing the Dell EMC Deal)
• From when the acquisition was first announced to the close
of the deal, EMC’s stock price was especially volatile
• The stock market gave the deal a lukewarm response. EMC
shares rose 1.8 percent to $28.36 after earlier jumping more
than 2.5 percent
• VMware shares plunged 7.8 percent to $72.48, decreasing
the value of Dell’s offer
• EMC stockholders were aware that if the two companies are
merged successfully, the new company formed would no
longer be publicly listed. For this reason, EMC
shareholders reacted to events only in anticipation of
how they may affect the buyout terms of the merger, not
in anticipation of post-merger efficiency

6. Security Analysts Reactions & Concerns
Key points were drawn by various analysts’ verdicts:
• Largest and perhaps most complicated mega-merger in
the technology industry to date
• Dell was private and the size and variety of the
financing, including the use of VMware tracking stock,
adds to the complexities.
• Regulatory hurdles are minimal, yet debt financing
may be more difficult to access
• The end-market challenges and transformation may be
better done without public market scrutiny
• FBR Capital Markets analyst Daniel Ives - VMware
would lose talented employees amid uncertainty about
their future under Dell, eventually hurting the company’s
performance
• Analysts were also worried that Dell’s plan to create a
VMware tracking stock will hit its price as the size of the
float increases dramatically
Event Data from Financial Press
The list of events is developed from The Wall Street Journal
online. Events are classified as one of three possible
categories: pro-merger, anti-merger or neutral
• Table 5 in report consolidates all such events
Examples
• “Dell & EMC: A Question of Size”
• “Why Dell’s EMC Bid leaves VMware looking like
devalued currency”
• “Dell Sells $20 Billion of secured bonds”
• “Dell to sell software unit to Francisco Partners and
Elliott Management”
• “China Grants Clearance”
• “Private clouds a ‘Big Priority’ for Dell”

7. Value Creation
• Significant revenue synergies from cross-selling to each business’s customer base
• Revenue synergies are expected to be three times the cost synergies, pointing to over $1B in potential additional annual revenue
• ~$300M in potential cost synergies in addition to EMC’s existing restructuring plan to achieve $850M of cost savings
• A deal with EMC also makes Dell a meaningful player in data protection, where it hasn't been able to compete against the likes of
EMC's Data Domain and Avamar lines
• Channels: The merged entity will be a behemoth with access to each and every channel ranging from consumer, mid-market and
enterprise customers. Dell and EMC will complement each other
• By integrating Dell will have the most complete portfolio of technology solutions: Software, Hardware and Services
• In storage, the two companies' product lines largely complement each other. EMC's are geared toward larger enterprises while
Dell's are stronger at the low-end price point
• The acquisition "reinforces the 'better together' synergy between VMware and Dell EMC”

8. Acquisitions by Competitors
A detailed list of acquisitions by Dell & its competitors is provided in the Report, along with the reasons and
acquisition strategy exercised by each player
Parameters of
Comparison
Dell HP Lenovo Apple
Internal
Growth
High Low High Medium
Inorganic
growth
Medium High (100+
acquisitions)
Low (Few no. of
acquisitions)
High (100+ acquisitions)
Largest M&A
Deal Value
$67 billion
(Dell-EMC)
$25 billion
(Compaq)
$2.91 billion
(Motorola Mobility)
$3 billion
(Beat Electronics)
M&A
Industries
Diversification is the
objective
Unrelated acquisitions
(both horizontal and
vertical)
Acquisitions in
related industries
Acquisitions in related
industries (vertical mergers
majorly)
M&A Strategy Diversify and be an
end-to-end provider
to the customers
Acquire companies
from different
industries, if required
split company divisions
Small and limited
acquisitions to get
into related
industries
Targets smaller companies
and integrates their
offerings into its own
products

9. Dell’s Financial Ratios post acquisition
Liquidity Ratios FY2016 FY2017
Current Ratio 0.931 0.807
Quick Ratio 0.867 0.740
Net working capital to
Sales -0.034 -0.118
Profitability Ratios
Gross Profit Margin 0.165 0.220
Operating Profit Margin -0.010 -0.038
Net Profit Margin -0.022 -0.019
Activity Ratios
Inventory Turnover 26.266 19.115
Total Asset Turnover 1.128 0.526
Fixed Asset Turnover 30.874 10.997
Financial Leverage
Ratios
Debt to Assets 0.940 0.968
Long term Debt to Asset 0.236 0.364
Debt to Equity 24.529 4.271
Equity Multiplier 30.779 6.218
Interest Coverage Ratio -0.666 -1.136
Shareholder Ratios
EPS -2.73 -1.70
Return Ratios
Operating return on
Assets -0.011 -0.020
Return on Assets -0.024 -0.010
Return on Equity -0.753 -0.061
• Due to the significant increase in debt, the Liquidity ratios and the
Debt to Asset Ratios have decreased
• EPS and Return on Equity and Return on Capital performance of the
company has improved
• Improvement in Gross Profit Margin, though due to the high Interest
rate costs, the Net Profit Margin has not improved by much
• As a result of this acquisition, S&P Ratings Services in October
maintained Dell’s BB+ corporate rating and placed EMC’s A
corporate rating on CreditWatch with negative implications
• Moody’s placed Dell’s Ba2 corporate rating under review for an
upgrade and placed EMC’s A1 senior unsecured rating under
review for a downgrade

10. Deal History
Before the announcement of the deal there were 50 confidential meetings that were held between Dell & EMC’s management
team. Internally the project was known as Emerald. Dell had the code name Diamond, while Silver Lake was Spartan
Go-Shop Clause
• There were no counter offers made
by EMC to Dell however, in the
merger agreement, EMC had asked
for a ‘Go-Shop’ provision to be
included
• Allowed EMC to solicit bids from
other parties and pay a discounted
breakup fee to Dell, if there was a
deal with another company.
• Showed how EMC’s CEO Joseph
Tucci tried to exhaust all arguments
so as to convince the company’s
shareholders that a deal with Dell
would be the best possible
outcome for them
• The clause expired after no
acquisition proposals were received.
Court Battles
• EMC felt the wrath of its
disgruntled shareholder
• Multiple suits were filed against
EMC by its shareholders
• Suits were filed claiming that
EMC filed a misleading
preliminary proxy statement with
the US Securities and Exchange
Commission (SEC) in an attempt
to gain shareholder support
• A Class Action lawsuit was also
filed on behalf of EMC
stockholders claiming that EMC is
misleading them and omitting
material facts.
Deals with Regulatory Authorities
• Go ahead from US Regulatory
authority FTC and European
Commission
• Applied to Chinese Authorities for
getting the Anti-Trust approval which it
ultimately got in May 2016
Golden Parachutes
This defense strategy was used in the deal
wherein the target company enters into a
special compensation agreement with its
top-level management if they are removed
from their position. Here, EMC’s CEO
received compensation worth $27 million
from Dell Inc. as a part of agreement

11. Subsequent Performance & Approval
• Restructuring of the core product groups in the new company (Dell
Technologies) which led to the outset of few people from the senior and mid
management level
• The old product divisions: Servers, Core Technologies, Converged Platforms
and Solutions, Emerging Technologies, Networking were changed and the new
division structure
• This was followed by a 3-stage layoff process involving different locations
across the US geography including the Dell and EMC headquarters in Texas
and Massachusetts - overall 20-25 per cent cut for Dell EMC employees -
meaning 28,000 to 35,000 jobs going
Competitor Analysis
ROE
2015 2016 2017 2018 2019
Dell Technologies -35.3 -50.5 -22.23 -22.28 -77.6
Hewlett Packard 0.12 0.64 -0.81 -8.64 -2.86
Apple Inc 46.2 36.9 32.11 50.76 50.12
EPS
2015 2016 2017 2018 2019
Dell Technologies -3.02 -2.72 -1.76 -4.01 -0.13
Hewlett Packard 1.34 1.82 0.21 1.23 0.77
Apple Inc 9.22 8.31 9.21 11.91 11.89

12. Conclusions & Way Forward
• Dell is creating value for itself by acquiring EMC as now it’ll be able to service all the customers
• With huge salesforce from EMC, an IT systems product line with all possible products, Dell would definitely be able to
service the customer in a better way; the value it wanted to create by going private
• Dell EMC is perfectly positioned to offer cloud computing, both public and private clouds. This of course includes the
virtual services that comprise cloud computing and the storage models that enable it
• Dell EMC can be in the forefront providing hardware and software as needed by businesses, education and governments.
• Would be aiming to be the leading player in Servers/Storage/Virtualization/Converged Infrastructure/Hybrid
cloud/Security via RSA
• Key drivers from the deal would include – complementary product and scale, extend its franchise into larger enterprises,
become a powerful enterprise Salesforce

13. Thank you