Dell’s bid to complete its $67-billion buyout bid for EMC, already complicated and expensive, may get more so.
On Wednesday evening the Wall Street Journal reported that Dell may have to pay at least 10% interest to sell up to $9 billion worth of unsecured junk bonds to help finance the huge deal.
A couple factors may spook investors. For one thing, last month Western Digital (WDC) had a hard time placing $5.2 billion in bonds to fund its purchase of SanDisk, according to the Journal.
For another, tech companies from Intel (INTC) and Microsoft (MSFT) have posted less-than-spectacular first-quarter in the past week, which makes people nervous about investing in yet another tech company.
The acquisition must be approved by EMC (EMC) shareholders at a meeting next month, at which point Dell is expected to approach the credit markets about funding.
The idea that Dell might run into headwinds and high interest rates, is not new. Shortly after Dell chief executive Michael Dell and his EMC counterpart Joe Tucci announced their grand plan in October, Fortune reported that financing could be a problem. At that time, market volatility had cast a pall on the high-yield debt market and investors were gun-shy about using debt deals to fund acquisitions.
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Since that time, all the parties to this transaction are slimming down. Dell sold Perot Systems, its IT services unit, to NTT for $3.04 billion late last month. and Dell’s SecureWorks unit is going public. EMC and its VMware (VMW) unit are both cutting staff.
While some pundits remain skeptical that the combined company can realize the promised revenue gains, it’s unlikely that anything will scuttle this massive deal. The general consensus is that credit will loosen up, and that most banks will want a piece of the action.
A Dell spokesman said the EMC deal, which is slated to close by October, “remains on-track, under the original terms and timeline.”