EMC CEO Joseph Tucci and Dell CEO Michael Dell.
Photographs by Getty Images

Even if the combined company squeezes out costs, the road to profitability remains rocky.

By Barb Darrow
April 21, 2016

Barring a massive unforeseen event, Dell will complete its $67 billion acquisition of business technology giant EMC sometime before October. An EMC shareholder vote, slated for next month along with regulatory approvals in some countries are still pending, but no one seems to think anything will derail the deal at this point.

If all goes smoothly, the proposed convergence of Dell, EMC and VMware would combine Dell’s PC, laptop, server and software expertise with EMC’s enterprise storage products, and VMware’s virtualization software which is run by an estimated 80% of corporate data centers.

Proponents say there is very little overlap although Dell has its own storage business that targets small- and mid-sized companies and all of the parties have their own take on cloud computing, but that’s supposedly being rationalized.

Still, doubts remain about whether this expensive—and debt laden—acquisition will create a profitable entity. Right now EMC and VMware are each profitable in their own right. EMC emc , for example, this week reported $268 million in profit on revenue of $5.48 billion for its first quarter; VMware vmw reported profit of $161 million on revenue of $1.59 billion. Dell is privately held.

Big mergers open the door to cost savings because the resulting company can eliminate redundant jobs, departments, and buildings, for example. However, doubters wonder how the combined tech behemoth can deliver “revenue synergies three times larger than the cost synergies,” as both Michael Dell and EMC emc chairman Joe Tucci have claimed since the blockbuster plan was announced last October.

In English, the EMC-Dell braintrust is telling the world that while the combined companies can and will cut expenses, they will also be able to reap three times the amount saved by selling more stuff than they could independently. Talk about your win-win.

But, by his own calculations, Jeffrey Goldfarb, editor of financial news site BreakingViews.com, doesn’t see how that can happen. Citing Dell’s expectations to slash cut $1.5 billion to $2 billion of annual expenses in the first two years, he wrote:

That implies up to another $6 billion in new sales generated simply by having the businesses under common ownership, around a 7% increase to the combined top line of $74 billion.

Read the whole analysis for details, but his conclusion is that the merged company must generate a whole lot more revenue to make this transaction profitable. Given past history of tech mega-acquisitions, Oracle’s orcl $7.4 billion Sun Microsystems deal in 2010 being a good example, that’s really hard to pull off.

In terms of EMC’s cost structure relative to its new parent company, CRN points out that EMC pays its executives better, on average, than Dell does. And a good number of those highly-paid EMC execs have been named to the senior management team of the new company.

Said one EMC insider who requested anonymity: “You have to wonder if any of those figures will be re-set going forward.”

And should any of those EMC executives get terminated “for cause” or leave the new company within two years, it could trigger some very lucrative severance payments.

So much for that unified EMC cloud effort

Shareholders in VMware, a publicly traded software company in which EMC owns a majority stake, have been a sticking point since the dealwas announced; they felt Dell was getting VMware as part of a package for much less than it was worth.

In the intervening months, EMC and VMware sought to placate this contingency by ending plans to combine VMware’s and EMC’s cloud businesses. And earlier this week VMware announced a $1.2 billion stock buyback that is timed for after the EMC shareholder meeting next month.

For more on Dell-EMC:

EMC would not comment for this story but pointed Fortune to an independent survey by Enterprise Strategy Group released in November that showed many customers that buy from Dell or EMC’s constellation of companies, favor the merger.

Get Data Sheet, Fortune’s technology newsletter.

A full 75% of the 202 IT professionals surveyed felt the combined EMC-Dell would benefit their organization and 63% looked forward to simpler “vendor management,” which means that it would be easier for a customer to deal with one big supplier than two smaller suppliers.

Dell had no comment other than to say the deal is proceeding as planned.

SPONSORED FINANCIAL CONTENT

You May Like