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Dell’s EMC acquisition underscores drive for greater relevance, says Fitch

Dell Inc.’s acquisition of EMC Corp. underscores legacy technology companies’ drive for greater relevance in a remarkably competitive environment, according to Fitch Ratings.

The ratings agency says the deal will alter the competitive landscape in the technology space, creating increased competition for tech companies with significant complete enterprise computing services like Hewlett-Packard Enterprises (HPE), IBM, and Oracle.

Dell and EMC signed a definitive agreement under which Dell, together with its owners, will acquire EMC, a leading storage and virtualization provider, for a total consideration of $67 billion.

The acquisition will result in the world’s largest integrated information technology (IT) provider by revenues and will strengthen Dell’s storage and virtualization offerings, providing higher profit margin growth opportunities.

The acquisition adds significant scale in storage for enterprise customers as Dell continues to pivot away from roots in personal computers (PC). Dell expects revenue synergies from the ability to offer converged infrastructure (combined storage, networking, and servers) as a result of the combination.

Nonetheless, Fitch does not believe the deal in and of itself addresses top line pressures facing each company as the market shifts to cloud-based software and standardized solutions from legacy on-premise hardware products.

The acquisition should strengthen Dell’s competitive position among leading IT providers, including IBM and HPE, although at a time when HPE is separating from its lower growth PC and printing units to sharpen focus on enterprise markets.

Fitch notes that the 60-day “go-shop” period could spur large technology rivals without significant storage capabilities, including Cisco Systems (Cisco), to make a bid.

Dell’s already significant scale provides procurement efficiencies for memory, hard disk drives and other components utilized across the hardware business, specifically PCs, servers, and storage. The EMC acquisition only bolsters that effect.

On Oct. 13, Fitch placed the ratings for Dell and its direct wholly owned subsidiary, Dell International LLC (Dell International), on Rating Watch Positive following the announcement that Dell will acquire EMC for a total consideration of $67 billion. Fitch’s actions affect $14.8 billion of total debt.

The deal is subject to customary conditions, including receipt of required regulatory and EMC stockholder approvals, and is expected to close mid- to late-2016. It also includes a “go-shop” provision, meaning that if EMC gets and entertains a better offer during a certain timeframe, the company will pay Dell substantial penalties. ($2.5B at onset; additional $2.5B if another deal is completed within 12 months of Dell deal termination; $4-6B additional termination penalties specified in agreement)

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