Further thoughts on Dell’s acquisition of EMC

My prior public post about the EMC / Dell acquisition covered impacts to EMC shareholders and employee shareholders. This one is, again, my personal thoughts to discuss some of the broader implications. All of these observations are made from public sources and knowledge of how the tech industry works. I expect anyone familiar with the tech industry to be able to make similar observations / predictions.

Employees

For EMC (and in some respects, Dell) employees, the acquisition is going to be a mixed bag. Employees have no more details of the acquisition than the public at this point, so there’s a lot of uncertainty. So far, the message has been: it’s business as usual until the deal closes — which is at least 7 months away. I expect EMC will see higher-than-usual attrition over the next few months as folks who weren’t really looking before now leave for other opportunities. I wouldn’t be surprised if EMC starts offering some form of carrot to key players incentivizing them to stay. A lot of business obligations can come due in the next 7 months.

By many accounts Dell invested more money in R&D groups after going private. That’s good news for anyone in an engineering group. A friend also pointed out he “[thinks] it will be beneficial for engineering organizations [to be inside by a non-public company]. The less chained by the public market for short term profits and gains, the better the chances of being able to survive flat growth a quarter or two to realign priorities” — which I completely agree with.

Dell and EMC don’t have a whole lot of overlap in products, although there are a few, so there’s unlikely to be layoffs trying to reduce duplication there. There will probably be layoffs as Dell and EMC try to reduce non-engineering duplication in areas like HR, marketing, IT, sales support, and sales to some degree. Dell is going to need to reduce their ~$49 billion debt load after the acquisition (which they intend to do in 18-24 months) and it seems to me that reducing head-count is one way to achieve that. Another way of reducing their debt load would be to divest themselves of some products or product lines, either by selling them to someone else or simply stopping spending money on them by sunsetting the products and laying off the people.

Post-acquisition I would have expected Dell to put a kibosh on the use of Macs which are growing in EMC, but a friend who works for Dell said that other acquisitions which had Macs keep them alongside a Dell laptop for use in front of customers. Given how closely Dell seems tied to Microsoft, I expect its IT organization to push (require?) Windows workstations instead of Linux workstations which are the system of choice in Isilon.

That same friend at Dell says compensation is great and everything is cash or cash awards, so no stock — not a surprise since it’s a privately-owned company. They said it does appear that being private has allowed Dell to do more than play the quarterly-numbers game.

From some of the intangibles, there’s a whole lot of potential upsides and downsides. EMC is a very east-coast company who doesn’t really grok how west-coast companies work. I expect (but don’t know) that Dell being based out of Austin is more aligned with the west-coast mentality which is nice. Both EMC and Dell have a perfect 100 rating on the HRC Corporate Equality Index. Both have both LGBT and Women’s employee resource groups, among others. Dell trumps EMC in offering matching charitable donations but not on-site dry cleaning in MA like EMC — so east coast.

Recruiting

EMC probably isn’t going to be really pushing recruiting during the transition, except for backfills. I expect recruiting for EMC to be challenging until the deal closes. Typically public tech companies include some equity in their offer, either as stock options or RSUs, that vest over a few years. Equity is usually enticing because their worth is tied to the market performance of the company. If the stock goes up, the equity is worth more. This gives the illusion that hard work by an individual can improve the value of the stock.

Dell has assured that the EMC share price is largely fixed around $27 until the deal closes mid-2016. This also fixes the price of any options (which are rendered pretty much worthless if they are issued after today) and RSUs. This makes RSUs more like promises of fixed values than a promise of potential future growth rendering their use in offers less enticing than they were before the acquisition announcement.

It’s going to be hard over the next 12 months to even get people to interview with EMC. Who wants to start working at a company in the middle of a huge acquisition where there will be reorganization and “vision alignment” as soon as the deal closes?

I think overall the acquisition is going to be a positive thing, but the sooner it completes the better it is going to be for everyone.

Thoughts on Dell’s acquisition of EMC from public sources

On Monday, October 12th EMC and Dell announced that Dell was buying EMC. This will make for some interesting times for EMC shareholders and employees. The deal is made more interesting by the fact that, unlike EMC, Dell is not a publicly traded company. Michael Dell (with the help of Silver Lake) took his company private back in 2013.

There has been a lot of news about the acquisition. These are some personal, collated thoughts gathered from public sources (with citations) and in no way reflect the view of my employer (current or future) or any inside information.

Stockholders

From the official press release, EMC shareholders will get $24.05 a share in cash and $9.10 of a tracking stock tied to VMware. One could naively say this values EMC stock at $33.15, but there’s a twist. The twist is the tracking stock, an investment vehicle last seen prior to the dot-com bubble.

In theory, tracking stock gives investors a way to reflect value in another security (in this case VMware stocks owned by Dell) but generally grants no dividend or voting rights. Some analysts expect the tracking stock, which in theory will track the value of VMware stock, to trade from between 5 and 10% discount of that stock. (That link is an excellent read, BTW.) This partially explains why the stock has been trading between $27 and $28 since the acquisition announcement instead of closer to $33.

Also, note that as a private company, Dell won’t pay dividends like EMC, which is a bummer for those of us investors who liked that aspect. VMware doesn’t (yet?) pay dividends so there’s no love lost on that aspect of the tracking stock.

Employee Shareholders

Many (most?) employees are shareholders as well, either through the employee stock purchase program (ESPP) or through equity awards. What will happen to stock options and restricted stock units (RSUs) is unknown at this time.

According to Ars Technica, when Dell went private back in 2013 stock options that were underwater were cancelled. Unvested RSUs retained their vesting schedule but were paid out as cash upon vesting using the stock price when Dell was privatized. The upside is that the RSUs were essentially converted into promises of cash at a fixed value, but that’s a downside too — they aren’t going to be worth more than that fixed value, ever.

Employees & Recruiting

I have additional thoughts on how this impacts current employees and recruiting. While I believe all of them are logical conclusions that anyone familiar with the tech industry could derive, and they reveal no internal information, it’s not worth the risk of EMC legal’s wrath to post them here. So I’m posting them in a separate, locked post for my own edification.