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Could a Competing Bid Back up the Dell-EMC Merger?

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Nov. 20 2020, Updated 4:50 p.m. ET

Could this deal get competitive?

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. We saw that happen in the Salix Pharmaceuticals deal.

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Could a competitor break up the Dell-EMC merger?

EMC has been pushed into a sale process by Elliott Management, which has seats on the board of directors. Elliott was evidently happy with the sale process given its public comments after the merger was announced. The deal has a 60-day go-shop provision, which should allow any possible suitors to come out of the woodwork, but a competing bid is looking pretty unlikely.

Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to prices of other deals in the same industry. This is always more art than science, since no two companies are alike and interest rate environments change. We do have some comps for the deal, but none of them are really all that good. Tech companies can command massive multiples when their technology is emerging and then low multiples when their technology is mature. For this reason, it is best to take deal multiples with a grain of salt. That said, here are some comparable deals:

  • BMC Software-private equity firms
  • Fusion-io-SanDisk
  • Isilon-EMC
  • Data Domain-EMC

These transactions are about the closest comparisons we have to the Dell-EMC merger.

In this transaction, Dell is paying about 2.6x trailing 12-month revenues and 11.6x trailing 12-month EBITDA (earnings before interest, taxes, depreciation, and amortization). These multiples are below the averages in the other transactions, which work out to be about 6.2x revenues and 82x EBITDA. Since the comps are all over the place, you can’t really draw any conclusions over whether EMC is getting taken out on the cheap or not.

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