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Why Some Shareholders Are Wary of the Dell-EMC Merger

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Jan. 12 2016, Updated 11:17 a.m. ET

EMC is a complex firm

EMC owns an 80% stake in VMware (VMW). VMware also constitutes a major portion of EMC’s revenue. Some shareholders had resisted the merger in order to avoid complicating an already complex set-up. The below graph shows the companies’ organizational, ownership, or capital structures. Teaming up with VMware and GE (GE), EMC formed Pivotal, an agile infrastructure for platform-as-a-service (or PaaS) and big data applications. This allows organizations to choose among EMC, Amazon (AMZN), or Microsoft (MSFT) Azure.

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On November 10, 2015, Re/code reported that Dell may have to incur a massive ~$9 billion tax burden following a regulatory review. This could make the EMC acquisition infeasible, possibly derailing the Dell-EMC deal. Further, Fenwick & West partner Michael Solomon stated, “If you believe in this deal, then you’ve got to believe that it can only happen in a tax-free manner. If this deal turns out to be taxable, it becomes substantially more expensive to Dell.”

EMC to lay off employees ahead of merger

In December 2015, EMC (EMC) approved a restructuring initiative where a “significant number” of employees would be laid off. First unveiled in July 2015, the plan lays out operational efficiencies that will reduce yearly expenses by $850 million.

According to EMC’s SEC filing, its management expects a substantial part of the restructuring to be completed by 1Q16 and the entire process to be completed by the end of 2016. The total expenditure is estimated at $250 million with “total cash payments associated with the plan expected to be $220 million.” The $250 million will include severance pay for the employees who have been laid off and other associated costs.

EMC constitutes 2.8% of the SPDR Morgan Stanley Technology ETF (MTK).

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