m-a
Business Management

This month in M&A: Concerns over Dell's debt outweigh any concerns about China

This is a contributed piece by Brett Cole of ansarada 

Debt Dell

If there is one figure in the $67 billion takeover by Dell, Silver Lake of EMC that stands out it is not the headline figure. It is the debt. 

Almost 60%, or $40 billion, of the total acquisition price has been borrowed. Dell and Silver Lake, according to the New York Times, has assured the rating agencies such a huge amount of debt will not put an immovable weight on the new company. 

Such a massive debt load cannot be easily brushed aside by assurances to debt rating agencies. After all it has to be repaid and can only be done so if the merger works.  That is dependent on Dell and Silver Lake managing an enterprise services company when Dell’s DNA is personal computers. 

Dell and Silver Lake are betting that companies will want to buy network servers, enterprise services, computers, network security and content management from just one provider.  

But that may be increasingly unlikely given the nationalistic lines of the cyber security debate. A non-US company, one would imagine, would seek out enterprise solutions from within its country’s borders rather than buy such products from America.

So the Dell-EMC has tens of billions of dollars of debt and an uncertain and unproven business model that seeks to sell computing, storage and networking under one roof. 

Not at first glance is the Dell-EMC deal a recipe for success.

The price of LUV

Putting a price on love is not as difficult as it seems. The problem is its valuation.

IAC/InterActiveCorp's Match Group, which controls online dating sites Tinder, Match.com and OKCupid, has filed to sell shares in an initial public offering (IPO). 

Match Group, which also includes test preparation service the Princeton Review, is profitable. Its sales and net earnings are, unsurprisingly in a world looking for love, growing. Revenue last year was $888.3 million. Net earnings in 2014 were $148.4 million.

The problem for Match Group's IPO, like many a potential relationship, is in its timing. 

The US IPO market is looking distinctly shaky. Payments company First Data's IPO was priced below its preferred range. Supermarket chain Albertsons has delayed its IPO pricing. Luxury retailer Neiman Marcus has decided to wait until next year to sell shares in an IPO. There have been 36% fewer US IPOs this year than last, according to Renaissance Capital. 

Match Group could buck the trend. It has name recognition among ordinary investors. Unlike the private equity backed First Data, it seems unburdened by debt, an alluring prospect to any potential stock investor suitor.

The only question is price. Match Group's IPO managers, JPMorgan Chase, Allen & Company and Bank of America Merrill Lynch will have to show a degree of sensitivity to investors, not unlike those on a first date, to ensure there is a buzz that offers the prospect of a happy ever after. 

The China Syndrome 

At a Citigroup conference in Sydney all the talk was about China: how much is its economy slowing, how dreadful that is for commodity exporters such as Australia and whether the state can maintain social stability.

New Zealand’s finance minister Bill English said he hoped top Chinese officials are “as smart as we think they are”.

Will slowing economic growth, (Citi economist Johanna Chua estimates the world’s second-largest economy grew 4.5% in the third quarter), reduce China’s appetite at the M&A tech banquet?

I don’t think so. China is in the midst of transforming its economy to more of a service and information technology oriented one, leaving, to some extent, polluting, heavy industry behind.

That will mean Chinese state-backed companies - aren’t they all in some form or another? - continue to seek acquisitions in Silicon Valley and its equivalents in other parts of America and Europe, India or China itself.

China is increasingly forging ties with Silicon Valley venture capitalists who too are seeking out Chinese investors and companies to invest in. Global venture capital firms have either offices or a semi-permanent partner based in China searching for deals. Chinese companies are doing the same thing with offices in the Bay Area or frequent visits to the west and east coasts to discuss potential deals.

With many US tech companies preferring to stay private longer than in previous economic cycles the opportunities for Chinese investors to acquire stakes in such firms is only growing.  

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