UPDATED 06:37 EST / APRIL 25 2016

NEWS

Fears grow over the size of Dell’s debt once EMC acquisition goes through

Dell Inc.’s already extremely convoluted acquisition of EMC Corp. could be about to get even more so, according to new reports.

According to a Wall Street Journal report last week, Dell may be faced with paying “at least” ten percent interest in order to sell $9 billion worth of unsecured junk bonds in order to finance the takeover.

As such, a few things might scare away investors.

Firstly, there’s the case of Western Digital Corp., which last month had a very tough time placing $5.2 billion in bonds to finance its takeover of SanDisk Corp., the Journal says. Meanwhile, now is not a good time to be a tech company, with legacy giants like Intel and Microsoft both reporting less-than-amazing earnings last week. The Journal says this might make investors wary of pumping their cash into yet another legacy tech vendor.

Dell faces another problem with its SecureWorks IPO, which is priced at just $14 per share instead of the original $15.50 to $17.50 range. This will reduce the inflow of cash into Dell, and means that the company won’t be able to reduce its debt burden as much as it had hoped.

Still, few people believe the deal will be derailed any time soon, these things just mean Dell will have a tougher time paying off its debts and turning over a profit once the transaction has been completed.

The acquisition still needs approval from EMC’s shareholders at a meeting scheduled to take place next month. Assuming EMC’s shareholders give the deal the go-ahead, Dell will then approach its investors and banks for funding.

Of course, the news that Dell might be lumbered with higher-than-expected interest rates isn’t new. Fortune reported that financing might be a problem for Dell as early as last year, just after Dell CEO Michael Dell and EMC counterpart Joe Tucci announced the deal. It said that market volatility might impact the high-yield debt market, and that investors were growing wary of using debt deals to fund takeovers.

Dell has tried to alleviate the problem by slimming down both itself and EMC. The company sold off its IT services unit (formerly Perot Systems) to Japan’s NTT Corp. for $3.04 billion just last month, and of course it’s cast SecureWorks out on its own. Meanwhile at EMC and its very important subsidiary VMware Inc., staff lay-offs are ongoing.

Many analysts remain skeptical of Dell/EMC’s chances of realizing the revenue gains they promised when first announcing the deal, but despite this it’s looking more certain than ever that the deal will soon go through. Experts agree that no matter what, the big banks and financiers in the deal are still extremely eager for a piece of the action.

Meanwhile Dell continues to repeat that the deal, expected to close in October, is “on-track under the original terms and timeline”.

Image credit: Klausdie via pixabay

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