How Dell Inc. pieced together $67 billion to buy EMC

Posted August 8th, 2016

When Dell Inc. first announced its $67 billion deal to buy the fellow technology giant EMC last year, the transaction faced no small amount of skepticism — in large part because it was simply so expensive.  

Yet after months of complicated financial maneuvering, EMC shareholders voted last month to approve the sale.  

Dell Inc. isn’t out of the woods yet. The Round Rock-based tech giant — the largest private employer in Central Texas — still needs approval from Chinese regulators. And once the deal closes, Dell faces the challenge of integrating a fellow old-line tech company in a world in which new technologies have already upset other venerable names and other old-guard companies are breaking apart.  

How Dell, led by Michael Dell and its financial backer, investment firm Silver Lake, made it this far is in part a tale of an unusual struggle to finance the biggest-ever takeover in the tech industry, one that drew on debt raised in the face of tumultuous markets.  

The goal ultimately was to raise nearly $50 billion in all major debt markets. Jim Casey, head of debt capital markets at JPMorgan Chase, the lead bank in raising financing, said there had never been a deal done before where every single major market was tapped. “We were looking for every vein of money that was available,” Casey said.  

And even more, Dell and EMC managed to push more than $40 billion of that borrowed money into investment-grade ratings territory even though Dell is rated below investment grade — a feat that will save billions of dollars a year in interest.  

Dell and Egon Durban, the Silver Lake managing partner who helped lead the leveraged buyout in 2013 that made Dell a private company again, said they strongly believed that the computer maker should seek to get bigger — even as rivals like Hewlett-Packard were shedding businesses to become more focused.  

“We’ve created the leader in an impressive number of categories,” Michael Dell said in an interview. “We definitely have tough competitors, but I like to think that some of them may be running around trying to figure out how to respond to this combination.”  

Plans for taking on a target as big as EMC began as far back as October 2014. In addition to the tens of billions of dollars worth of loans and bonds that needed to be arranged, more than $6 billion worth of assets, including major divisions, had to be sold.  

Dell and Silver Lake also devised a “tracking stock,” a publicly traded security tied to the performance of virtualization software maker VMware, which was spun out of EMC into the public markets but is still mostly owned by it. The tracking stock would force Dell to publicly disclose some financial information, something it has not had to do since going private in 2013, but the move proved vital for the financing, since the stock could be used as collateral for some of the debt.  

Some of Dell’s own potential banks balked early on, arguing that they could not sell enough junk bonds to finance the deal, and other lenders refused to participate if they could not easily resell some of the loans to other investors.  

Then Dell, Silver Lake and the bankers came up with an idea, pushed by Durban: Sell more high-rated loans and bonds, a questionable idea for a junk-rated company like Dell.  

The financing was arranged in stages. Timing for the sales of the first part, the highly rated bank loans, proved to be tricky. The Dell-Silver Lake team waited anxiously during the winter of 2015, wary of market conditions. Things worsened by January and February, as markets across the globe whipsawed in fear of a slowing China and looming global recession.  

News articles began to appear citing trouble in the efforts to raise money and in particular what was described as a delay in closing the first bundle of loans. Behind the scenes, however, the financing round was oversubscribed. But the companies and their bankers left the round open for more than a week to try to extract every possible dollar that could be found.  

By March 28, Dell and Silver Lake had sold $9.4 billion, drawing $2 billion more than they had expected.  

Still, more debt needed to be raised. Less than two months later, Dell’s banks went out to sell what was originally going to be $16 billion worth of investment-grade bonds. But investor demand for the debt proved significantly higher than anticipated, prompting Dell and the banks to increase the order size to $20 billion, the second-largest investment-grade bond offering this year after a $45.8 billion deal for Anheuser-Busch, according to Thomson Reuters.  

The Dell and Silver Lake teams held some 40 calls for the offering between May 9 and May 17, eventually reaching roughly 200 investor accounts. During those meetings, executives pointed to Dell’s record of paying down debt from its leveraged buyout, as well as explaining the logic of the deal and the combined company’s ability to cover the debt payments.  

The success of the investment-grade bonds made selling the remaining debt much easier. Less than two weeks later, Dell’s banks went to market with the so-called Term Loan B, a lower-grade bank loan that was broken into pieces and sold to institutional investors. The company’s advisers reduced the size of that offering to $5 billion from $8 billion.  

Then about a week later, on June 8, Dell’s banks staged an offering for the final piece of the debt puzzle: traditional junk bonds. Appetite for the offering again proved strong, allowing the bankers to sell the debt at an interest rate of 6.5 percent, or nearly half of what they had anticipated. Again, the banks were able to cut the size of the offering, to $3.25 billion from roughly $9 billion.  

Two weeks later, on June 20, Dell was able to complete the final stage of its financing puzzle, selling its software businesses to two investment firms — including Elliott Management, the activist hedge fund that had pushed for a sale of EMC a year earlier — for more than $2 billion.  

By the end of the financing campaign, Dell and Silver Lake fashioned a capital structure where the combined company generates about $7 billion in annual earnings before interest, depreciation, taxes and amortization. Its overall annual interest payments total roughly $2 billion.  

That helped pave the way for last month’s shareholder vote, where 98 percent of the votes cast were in favor of the deal.