Dell Buyout of EMC Could Shift Balance of Power in the Industry

Dell and Silver Lake Partners on Oct. 12 announced the takeover of

We are increasing our fair value estimate for EMC to $30 per share based on details included in the announcement and the likelihood of the deal going through as planned. The assumptions in our discounted cash flow model remain largely unchanged and, as a stand-alone entity, EMC shares are worth $27 each.

In a related press release also issued on Oct. 12, EMC pre-announced third-quarter financial results. The company now expects consolidated revenue of between $6.05 billion and $6.08 billion (just below our expectations) due primarily to a timing issue related to $100 million in unshipped storage product orders.

The Dell and Silver Lake buyout deal is expected to close between May and October 2016, pending regulatory and shareholder approval. While the details of the transaction are limited, the EMC federation corporate structure is expected to remain largely intact (for now), and Michael Dell and Joe Tucci will also retain their respective CEO positions until the transaction closes. We anticipate Tucci to retire shortly thereafter, in alignment with his earlier statements on the subject.

VMware will remain a public company, though Michael Dell signaled his intent to increase his economic interest and ownership stake in the future. The combined company is expected to continue with EMC's original plan to IPO its Pivotal business (Big Data analytics).

Taking a step back, the announced buyout comes during an interesting period of disruption across the tech space and has the potential to shift the balance of power in the industry. We believe that big industry names such as

Dell and EMC expect $1 billion in revenue synergies, from areas such as cross-selling and channel and salesforce leverage. We project cost synergies, too (somewhere in the $300 million range), but the messages of "bigger is better" and "increasing speed to market" were clear and point more toward capturing top-line growth. Along those lines, we are expecting significant software synergies between Dell and VMware software product portfolios.

Looking at the marketplace more holistically, we believe that Dell, traditionally stronger in end-user computing and small and midsize businesses, will seek to leverage the enterprise presence of EMC and VMware.

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