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Tech

Dell-EMC Means Leveraged Buyouts Are Back, Baby!

By
Mathew Ingram
Mathew Ingram
By
Mathew Ingram
Mathew Ingram
September 8, 2016, 8:30 AM ET
Gerry Hanan Hananexposures 2015

If you were around in the 1980s and following the world of finance, the term leveraged buyout probably calls to mind Gordon Gekko from the movie Wall Street, or legendary leveraged buyout kings like Carl Icahn and T. Boone Pickens.

Even the largest of those famous deals—the takeover of RJR Nabisco in 1988, in a controversial LBO led by buyout firm Kohlberg Kravis Roberts—has been eclipsed by the debt-financed acquisition of EMC by Dell, which officially closed on Wednesday.

The Nabisco deal was worth $55 billion in inflation-adjusted dollars, but the combination of Dell and EMC is worth $60 billion. And more than $40 billion of that is debt.

The acquisition is one of the largest technology deals in history, and also one of the most complex, since EMC has multiple operating units, including VMware. But will it produce enough value to justify the acquisition—and enough cash flow to pay off that mountain of debt?

Dell and EMC are confident it will, obviously, and so are the banks and institutions that arranged that gargantuan debt load. But it’s worth noting that other LBOs have failed spectacularly, and debt commitments were the main reason.

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The former holder of the title for largest LBO (in non-adjusted dollars) was TXU Corp., a Texas power company that KKR bought for $45 billion in 2007. It seemed like a great idea, but by 2013 the company was drowning in debt, and was forced to file for bankruptcy protection.

Will the future of a Dell-EMC merger be more favorable? There’s $60 billion riding on the answer to that question. If it does turn out to be smooth sailing, better get ready for a rush of leveraged buyouts in the technology sector.

About the Author
By Mathew Ingram
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