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Why Dell Is Considering LBO for EMC

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Financial profiles of EMC and Dell

Previously in this series, we discussed Dell’s (DELL) plan to resort to the debt market to finance its proposed acquisition of EMC Corporation (EMC). Let’s see how much debt and cash they hold individually.

EMC had $7.4 billion and $7.7 billion in debt and cash, respectively, on its books as of June 2015. Factset reports that Dell had $11.7 billion in debt as of September 2015. But unlike Dell, which is junk-rated from both Standard & Poor’s and Moody’s Investors Service, EMC enjoys investment-grade credit rating.

But EMC’s relatively low debt profile and investment-grade rating augurs well for Dell, which went private through leverage buyout worth $25 billion in 2013. Also, leveraged loans are seen in a positive light compared to bonds because they are backed by corporate assets.

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As the graph above shows, the data till July 2015 shows that the current year has already exceeded 2014’s acquisition-related issuance volumes. If this pace continues, a 64% year-over-year growth is expected in 2015.

The current deals highlight the trends prevailing in the economy when leading companies are taking advantage of low-interest rates to acquire companies in the rapidly growing areas of cloud, mobile, security big data to spur growth.

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Apart from the acquisition, companies are also resorting to bond sales to fund their share buybacks and dividends policies. The proceeds from some of the largest bond issuances in 2015—namely, from Microsoft Corporation (MSFT), Qualcomm (QCOM), and Oracle Corporation (ORCL)—were directed toward share repurchases and dividends.

Sluggishness in the PC market

Dell claims to hold third place in world computer manufacturing. As we have discussed on other MR series, sluggishness in the consumer PC market has forced companies to look for newer, greener pastures to fuel their growth. Dell is no different, which is why through the proposed EMC acquisition, it appears to be aiming to develop scalability in the rapidly growing market for cloud-based data services.

The Hewlett-Packard Company (HPQ), the second-largest PC manufacturer in the world, is also heading toward a split, and IBM (IBM) already sold its PC segment to China-based (MCHI) Lenovo, almost a decade ago.

You can consider investing in the SPDR S&P 500 (SPY) to gain exposure to the technology sector. The ETF invests about 18% of its holdings in the technology sector.

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