Is the Dell EMC storage merger causing buyer’s remorse?
According to published report, Dell Technologies is considering a return to the public market to satisfy the massive debt incurred from its 2016 merger with EMC. Options under consideration include an initial public offering of stock or a reverse merger with VMware, of which Dell already owns a majority stake.
The news comes less than 18 months after the Dell EMC storage merger was finalized, uniting the world’s No. 1 server vendor with the largest enterprise storage vendor by revenue.
Going public is one of several options reportedly being explored, but no decision has been reached. Dell EMC executives would not confirm the published reporting, which was first reported by Bloomberg. The company’s board of directors is expected to meet soon to hash out strategic options.
An interesting sidelight to a potential stock offering involves the impact on valuation of VMware. Dell owns 81% of VMware. A reverse merger would allow Dell to free up liquidity, while avoiding the expense and additional scrutiny of an IPO. VMware revenue surged nearly 14% last quarter to $785 million from licenses, reflective of more companies moving to the cloud.
Dell bought most of EMC’s interest in VMware as part of the deal, offering it as tracking stock that was used to help finance the merger. It’s also possible Dell could acquire the remaining stake in VMware and spin it off as a separately traded equity. Shares of other EMC Federation properties, such as Cloud Foundry or Pivotal Software, also could be offered as separate shares.
Greg Schulz, senior advisory analyst at Server and StorageIO, said Dell EMC faces storage challenges common to most legacy vendors.
“The demand for storage continues to grow, but so too do the options for customers to choose where, how and from whom they will consume it. Cloud providers are challenging traditional storage vendors, as are dynamic startups. It’s a dynamic buyers’ market, which means storage vendors need to start thinking in terms of new opportunities,” Schulz said.
Legacy Dell EMC storage gives way to VxRail, VxRack converged infrastructure
Dell EMC is carrying roughly $46 billion in debt financing related to the merger, and $3 billion in debt maturities start coming due in April. Part of the debt will be serviced from cash reserves of nearly $12 billion, but Dell apparently is exploring other avenues as a hedge against revenue declines related to its legacy networked storage.
Network and server revenue soared 32% during the last quarter, but Dell EMC storage revenue of $3.7 billion remained essentially flat for the second consecutive quarter.
Dell EMC closed last quarter carrying $52.5 billion in debt, up $2.6 billion from the prior quarter. The total debt balance increased in part due to VMware’s $4 billion bond issuance and about $300 million in increased structured financing for Dell Financial Services.
In separate but related news, Dell EMC said it is reshaping its Infrastructure Solutions Group (ISG),which encompasses networking, servers and storage – a move that recognizes how its traditional storage business is ceding ground to VxRack and VxRail converged infrastructure. The Dell EMC ISG unit is headed by longtime Dell executive Jeff Clarke, who took over when EMC veteran David Goulden retired last year.
Company officials disputed published reports that said the ISG shakeup was aimed to bolster Dell EMC storage revenues. However, the shifting strategy will use converged and hyper-converged platforms as the “tip of the spear.”
“Dell EMC has rolled out a new internal structure, designed to help simplify our organization for clear lines of decision making, get our products to market faster and align our teams to our biggest priorities. This will allow our product teams to accelerate active roadmap decisions as well as long-term product strategy and innovation,” Dell EMC said in a prepared statement explaining its decision.
“This new structure includes moving our converged and hyper-converged solution teams into the core product teams they work with most, to get Dell EMC innovation in the hands of our customer more quickly.”
Dell was a public company until 2013, when Michael Dell took the company private in a $25 billion transaction underwritten by equity firm Silver Lake Partners, which also provided $1 billion to orchestrate the EMC takeover. More recently, Silver Lake has ponied up a reported $5 billion to back networking giant Broadcom Ltd.’s buyout of Qualcomm Inc.