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DELL’S plan to carry out one of the largest technology deals ever — by buying the data storage and software company EMC for $67 billion — would seem to vindicate its decision two years ago to leave the stock market and “go private.”
Away from the limelight and what many see as the nagging demands of the public markets, the hope was that the company could revive its flagging business. And the fact that it can now contemplate buying EMC suggests that going private has paid off.But Dell is not making its audacious bid from a position of great strength. The firm’s financial performance has weakened in recent months, according to a confidential financial filing reviewed by The New York Times. In the first half of its latest fiscal year, Dell’s revenue, net income and cash flow from operations were all lower than in the same period a year earlier. In addition, financial changes that might be hard to sustain appeared to assist Dell’s cash flows.In theory, Dell’s lackluster performance increases the risks associated with acquiring EMC. If merging with EMC causes big disruptions and distractions, it could weigh on both Dell and EMC in the coming years. It does not appear that there were other serious suitors for EMC. And in a less friendly time in the markets, when debt cost more and borrowing was more difficult, Dell might have struggled to pull off this deal.Continue reading the main storyVideoMichael Dell on $67 Billion Deal for EMCMichael S. Dell, right, and his counterpart at EMC, Joe Tucci, explain why they are getting bigger at a time when companies of all stripes believe smaller is better. By CNBC on Publish Date October 12, 2015. Photo by CNBC. Watch in Times Video »
A Dell spokesman declined to comment on the numbers.
The deal has its supporters. They contend that buying EMC will allow Dell to diversify further from personal computers, and that the combined entity will be a giant that can better compete in the fast-changing technology sector.
“We think the combined companies will be better positioned to offer the type of infrastructure I.T. solutions that the market’s moved toward,” Richard J. Lane, an analyst at Moody’s Investors Service, said. Moody’s said on Monday that it was reviewing whether to upgrade the credit rating for Dell, which is in junk territory.
Continue reading the main storyDefenders of Dell’s decision to go private might brush off its weaker performance by arguing that sometimes a company in flux needs to take financial hits to reposition itself. Companies go private, they might add, precisely to avoid the pessimism and second-guessing that takes place when a firm reports a couple of subpar quarters.
Still, it has been two years since Dell went private, which should be enough time to show some strong signs of health.
Dell sends regular quarterly financial reports only to holders of its debt securities. Since these securities were sold under special rules to institutional investors, the company does not have to file them publicly with the Securities and Exchange Commission. (A one-time filing of Dell’s results will occur as a result of the merger with EMC, a Dell spokesman said.)
Continue reading the main storyTop Technology Sector Takeovers
Dell struck the biggest-ever takeover in the technology industry by buying the storage provider EMC.
The 44-page filing reviewed by The Times is for Dell’s fiscal second quarter, which ended July 31, 2015.
In the six months leading up to that date, Dell had a net loss of $768 million, compared with a $570 million loss in the equivalent period a year earlier. Revenue was also down, falling to $27.5 billion in the latest six months, from $29.5 billion in the year-earlier period. The company’s gross margin — or revenue minus the costs related to making its products and delivering its services, expressed as percentage of revenue — declined to 17.1 percent in the first six months of the most recent fiscal year, from 18 percent in the same period in the previous fiscal year.
A decline in gross margin can show that a company’s revenue is falling faster than its costs. And in discussing the gross margin, Dell’s filing pointed to some of the struggles it is facing in the division that focuses on selling computers. It said that the margin shrinkage was “primarily driven by an overall market decline resulting in a decrease in desktop and notebook units sold, in conjunction with challenging pricing dynamics.” Gross profit for that segment totaled $2.5 billion in the first six months of the latest fiscal year, down from $3.4 billion in the same period a year earlier.
The filing also shows that Dell’s financial arm is lending slightly more to customers to finance purchases of its equipment and services. At the end of July, it had extended $5.17 billion of loans, compared with $5.03 billion on Jan. 30, 2015, the end of its last fiscal year.
At companies with a lot of debt, cash flows are considered particularly important. Although Dell is making a loss in its income statement, it is generating positive cash flows from its operations. Still, the $733 million generated in the first six months of the latest fiscal year is well below the $1.16 billion recorded in the same period a year earlier. And in the latest period, Dell appears to have squeezed more cash out of sources than it might be able to repeat, such as by pressing its customers to pay more quickly. Cash flows also benefited from a large positive change in a line called “other assets.”
Some analysts, however, note that EMC currently has robust cash flows, which could support the merged entity and help service and pay off the debt that Dell will have to take on to finance the deal. “You are going to have an entity that has significant free cash flow that can be deployed to pay down the debt,” Mr. Lane of Moody’s said.
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