UPDATED 11:18 EST / NOVEMBER 25 2015

NEWS

Insiders: EMC scraps plans for joint cloud venture with VMware

The first casualty of EMC Corp.’s $67 billion acquisition by Dell Inc. appears to be its public cloud strategy, which was until recently set to see the disparate infrastructure-as-a-service offerings scattered throughout its federation combined into a new joint venture with VMware Inc. early next year. Insiders leaked word yesterday that the plan has been drastically scaled back after investors voiced concerns over the additional risk that the move would impose on the hypervisor maker, which has already witnessed its stock price drop about a quarter since the announcement of the merger.

Taking on a 50 percent stake in EMC’s loss-making Virtustream cloud business would likely only cause more shareholder backlash for VMware, the last thing that Michael Dell needs as he attempts to shepherd the biggest acquisition in the history of the technology world past regulatory hurdles. Sources familiar with the effort told the press earlier this month the company could be slapped with a $9 billion bill from the IRS due to a nuance in tax regulations that may require borrowing more from its lenders or potentially even derail the deal entirely. Having to go up against Wall Street on top of that would all but put the nail in the coffin.

That’s why EMC has reportedly decided to assume Virtustream’s losses by keeping a majority stake in the joint venture, which will also absorb VMware Inc.’s struggling vCloud Air platform and the hosting services of hyperconverged infrastructure subsidiary VCE. But it will take much more than that to satisfy Wall Street. Some investors are rumored to have outright threatened to vote against the merger with Dell if more measures are not taken to boost the hypervisor maker’s stock price, most notably the buyback of as many as $3 billion worth of shares.

While that’s not nearly as much as the IRS could end up demanding, meeting the ultimatum might still require Michael Dell to modify the agreements with his company’s lenders, further complicating what is already one of the most difficult deals on record. And that’s not even mentioning the third major change shareholders are reportedly requesting: That most of the protections VMware affords them today stay in place after the acquisition completes. Assuming it doesn’t fall apart before the issue can be brought up, that is.

Image via DasWortgewand

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