Trying to find efficiencies and synergies to save $1.7 billion.
The ink was barely dry on Dell’s acquisition of EMC, the largest technology deal ever, valued at $67 billion when it was announced in October last year – and already the layoff rumors are oozing from the woodwork.
“People familiar with the company’s plans” told Bloomberg that Dell will cut 2,000 to 3,000 jobs.
Dell spokesman Dave Farmer refused to comment specifically on the report on Thursday but said instead, as sort of a confirmation: “As is common with deals of this size, there will be some overlaps we will need to manage and where some employee reduction will occur.”
On Wednesday, the day the deal closed, CEO Michael Dell gave some clues in an interview: “There are some overlapping functions and that sort of thing – that’s not the primary feature of this, but there is some of that.”
These “overlaps” or “overlapping functions” are terms in corporate speak for real people, and these real people are mostly working in the US, according to the report: supply chain, marketing, and general and administrative positions.
Dell is trying to find some efficiencies and synergies to save about $1.7 billion in the first 18 months after the deal closes, so starting from Wednesday. They’re not dilly-dallying around cutting costs and laying off people.
Combined they have about 140,000 employees. So the trimming might have a long ways to go, especially if the cloud and the Internet of Things are not as fun as imagined. But that doesn’t mean that the headcount will come down – they’re bringing in foreign workers, mostly from India.
These are just applications. Not all of them will be certified, and of those that are certified, not all beneficiaries will be hired. But the data for 2016 isn’t complete yet either.
It’s the hot thing to do for tech companies: laying off existing workers in the US, and bringing it foreign workers on H-1B visas. The Senate has been looking into some of the abuses. In February, Senator Richard Blumenthal (D-Conn.) sent US Attorney General Loretta Lynch a letter requesting a Justice Department investigation. But the tech lobby will likely get the Senate back on track soon.
But Dell needs to save some money, one way or the other. Dell’s corporate credit rating is at the upper end of junk. It’s loaded to the gills with debt, stemming from when it was taken private. Now the EMC deal has piled new debt on the company, including $20 billion of bonds it sold in May, followed by a $5-billion leveraged loan.
It needed this pile of cash to pay EMC shareholders $24.05 per share. They also got a “tracking stock” linked notionally to EMC’s interest in VMware, but in reality they get no real ownership of anything. Tracking stocks were hot during the dotcom bubble, with disastrous results for investors.
The combined company is also trying to boost sales, which they’ve been trying to do individually for years. All old tech companies, including IBM and Microsoft are trying to boost sales, and particularly those in the withering PC ecosystem are having the hardest time. They need to find a new niche for growth, and so they’re all piling into the “cloud” and the adjacent “Internet of Things” that links even the fridge to the cloud. But this is precisely where Amazon, Microsoft, Facebook, Apple, and Google dominate.
This is the situation Dell and EMC are in. Both have a large part of their products scattered around the PC ecosystem, Dell with servers and PCs, and EMC with storage devices. A match made in heaven. And so they’re going to innovate their way out of it! As Michael Dell said in the interview:
“We’ve got the ability to innovate at scale and invest – not for next quarter, but we have the agility and speed of a startup, but the scale and reach of the largest company in the industry.”
Alas, Dell became successful by building the same boxes everyone else was building, but it was building them on order, marketing and selling them directly, and getting customers to pay before their computers were even assembled, which was a new approach to supply chain management and working-capital financing in the 1980s: For the first time in history, accounts receivable were a negative amount, and working capital was funded entirely by customers, free of charge. Credit cards made that possible.
That was Dell’s big invention. It gave it a huge cost advantage, until everyone started doing it. But it wasn’t technological innovation. EMC is a different animal. But now it’s under Dell’s control, and they’re carrying a lot of debt, and cost cutting is going to be the big strategy going forward.
Mergers & Acquisitions often just lead to more shut-downs, write-offs, and layoffs. But somebody is making a killing. Read… “Tech” Paid $5 Billion in Fees to Wall Street in 2016, and Look What it Got for it
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.