Basics of the transaction
As we saw in the first part of this series, Dell is buying EMC (EMC) for a combination of cash and stock. The total transaction value of the EMC-Dell merger is close to $67 billion if you include cash and assumed debt. Shareholders will receive $24.05 in cash and 0.111 shares of newly issued VMware (VMW) tracking stock. Shareholders will not be able to deliver VMware tracking stock when the deal closes to offset their VMW short position. The two stocks have different characteristics and are not fungible.
The following conditions need to be satisfied in order for the Dell-EMC deal to close:
- EMC shareholder vote
- The US Securities and Exchange Commission’s approval of the proxy statement
- EMC’s filing of a PNR (premerger notification report) to comply with the Hart–Scott–Rodino Antitrust Improvements Act
- Any other foreign antitrust approvals (disclosed in the Company Disclosure Schedule, which is not public)
Go-shop provision and breakup fees
EMC has a 60-day go-shop provision, which allows it to solicit other bids. This means for the first two months EMC is allowed to discuss a merger with another interested suitor. Go-shop provisions were typical in private equity deals before the financial crisis but had more or less disappeared.
This agreement has a number of termination fees, and investors should take a close look at the merger agreement and understand the terms of the transaction. If EMC terminates the deal because it has an alternative transaction, it will owe Dell $2.5 billion. If EMC terminates the deal during the go-shop period, the termination fee drops to $2 billion.
There are reverse termination fees, as well. If Dell terminates the EMC-Dell merger because it cannot get financing, it will owe EMC $4 billion. If Dell is able to get the money and still chooses to terminate the deal, the reverse termination fee increases to $6.0 billion. Reverse termination fees are typically seen in private equity transactions and not in strategic deals, unless there is a lot of regulatory risk.
Merger arbitrage resources
Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI). For a primer on risk arbitrage investing, read “Merger Arbitrage Must-Knows: A Key Guide for Investors.”
Investors who are interested in trading in the tech sector can look at the S&P SPDR Tech ETF (XLK).
Correction: When this article was originally published, it mistakenly indicated the following: “If Dell is able to get the money and still chooses to terminate the deal, the reverse termination fee increases to $4.5 billion.” The fee would actually increase to $6.0 billion. We regret this error.