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EMC-HP Deal Would Be Easier To Pull Off Than EMC-Dell Deal

A potential merger of equals between storage giant EMC and HP would make a lot more sense than a mega-deal with Dell, according to investors and financial analysts.

An EMC mega-merger with Hewlett-Packard would be a lot easier to pull off than a deal with privately held Dell in which the latter would have to be financed through an additional private equity debt offering, according to investors and financial analysts.

’From a financial standpoint, it would be almost impossible for Dell to pull this off since they are now a private company and it would be a massive leveraged buyout,’ said Jeff Matthews, general partner at Naples Fla. hedge fund Ram Partners. ’Dell is already operating as a leveraged buyout. A deal with HP would be a super-mega-leveraged buyout and that just makes it harder. An all stock merger with HP would be a lot easier to pull off financially. That would bring two aging clunkers together. You could get rid of the excess parts and have a faster car.’

Matthews spoke in response to a Wall Street Journal report that EMC, under pressure from an activist investor and facing the potential retirement of CEO Joe Tucci, had held merger-and-acquisition discussions with both HP and Dell.

[Related: Partners Would Welcome EMC Deal With HP Or Dell]

EMC, HP and Dell all refused to comment on the report.

Matthews said an EMC HP ’merger of equals’ makes a lot of sense.

’It would be relatively easy to pull off financially,’ he said. ’When a business slows down it is natural for companies to see who they can partner with to eliminate a lot of duplication. When there isn’t growth you’ve got to look at other ways to move forward. It wouldn’t be pretty. It would be hard work given the East Coast-West Coast differences and the political infighting that would go along with it. In the scheme of things it makes a lot of sense because time is running out for these legacy companies.’

Patrick Moorhead, founder, president and principal research analyst at Moor Insights & Strategies, maintained that Dell, which one year ago completed the largest private equity buyout at $24.9 billion in the last several years, would have trouble getting access to the type of capital needed to buy EMC's storage business.

Moorhead pointed out that Dell founder and CEO Michael Dell could step up and buy the business with his personal fortune.

"It would cost Dell between $20 billion to $25 billion for EMC's storage business,’ he said. ’I just don't see how Dell can make that work."

Moorhead said he sees Cisco as the most ’logical’ candidate to buy EMC, adding that "Cisco needs a better storage solution to fill out its portfolio."

The reports of a potential deal between EMC and HP or EMC and Dell follow hedge fund Elliott Management's purchase of a 2 percent stake in EMC last July. It also comes with longtime EMC CEO Tucci set to retire early next year.

Tucci has indicated he will step aside at that time and EMC and its board of directors have yet to name a successor.

In a 2012 proxy statement EMC has said the company entered into an ’employment arrangement with Mr. Tucci to remain with the Company through at least February 2015.’

Additional Reporting By Tom Spring

PUBLISHED SEPT. 22, 2014

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