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Rationale for the Dell-EMC Merger

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This deal is about building up Dell’s product offerings

This article will give a brief synopsis of the rationale behind Dell’s purchase of EMC (EMC). You can find a more detailed series on the strategic analysis of the transaction here: “Dell-EMC Merger the Biggest Ever in the Technology Sector.”

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EMC is a cash cow with some aging technology

EMC is big in the storage business, and its legacy storage products are facing declining demand. EMC’s investment in VMware (VMW) has been a big winner and represents the future growth of the company. That said, legacy products in the tech sector often exhibit slow growth, but tremendous cash flow. EMC last year generated $5.5 billion in free cash flow off of $24.4 billion in revenues. This is an astounding 22.7% cash flow yield. Even if you deduct the roughly $1.8 billion in free cash flow coming from EMC’s consolidated holding in VMware, the storage business still accounts for a significant amount of cash.

Dell is going to use that free cash flow to help pay down the debt it will assume to purchase EMC and, more importantly, to issue its stake in VMware, the cloud computing brand with growth prospects.

One-stop shopping

Dell said it anticipates roughly $2 billion in revenue synergies from the transaction. Revenue synergies basically mean that Dell hopes to sell EMC’s solutions to some of its customers. This will put Dell more in line with big enterprise players like Hewlett-Packard (HPQ) and IBM (IBM). Dell did not mention anything regarding cost synergies, which is understandable as there probably isn’t much in the way of overlap. Aside from some cost cutting by eliminating corporate functions like investor relations, there probably isn’t much here. The Dell-EMC merger is about building a walled garden.

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