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EMC tries to soothe doubtful investors

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EMC Corp. defended its pending sale to Dell Inc., attempting to soothe investors who have driven the Hopkinton-based IT supplier's share prices down amid questions about the deal's size and complexity.

"We're confident. We know what we're doing," EMC chief executive Joe Tucci said Wednesday in a conference call with investors.

Tucci acknowledged that slow sales growth reported Wednesday was due in part to "angst" about the merger with Dell, which is expected to close by October. But Tucci said the buyout remains the best path for EMC, and that he expects the deal to be completed without changes to its terms.


"This is a really big deal, and there's a lot of noise in the system," Tucci "A lot of people have a lot of opinions. A lot of them are not based on a lot of fact."

Shares of EMC and its most important subsidiary, datacenter software seller VMware Inc., have declined since the sale to Dell was announced in mid-October.

EMC stock has dropped more than 15 percent in that period, closing Wednesday's trading at $23.90. VMware shares have performed even worse, opening at $44.87 Wednesday, about 38 percent below the price when the Dell merger was announced. The stock closed at $44.44.

"It's been a living nightmare for VMware investors," said Daniel H. Ives, an analyst for FBR Capital Markets & Co.

Analysts said the lower prices reflect investor doubts about whether the enormous deal, worth $67 billion at the time it was announced, can still be completed amid lingering global economic unease. Dell is expected to borrow about $50 billion to pay for the buyout.

Investors also are confused about its structure, which includes a complicated tracking stock meant to help EMC shareholders account for the company's 80 percent stake in VMware, analysts said.


The agreement with Dell calls for EMC shareholders to receive $24.05 per share in cash, plus a VMware "tracking stock" that will fluctuate with that company's stock price. When they announced the deal, Dell and EMC estimated the total value per EMC share would be $33.15.

EMC shares, however, are now trading near the cash price offered by Dell. That means investors are essentially placing "little to no value" on the VMware tracking stock, Pacific Crest Securities analyst Brent Bracelin noted in a report this week.

"There's some question as to whether the deal will even get done. And what does that mean? Does that mean both stocks go up? Do they go down? What happens?" said John DiFucci, an analyst for Jefferies Group LLC.

Rajesh Ghai, an analyst for Macquarie Capital Inc., wrote that EMC and Dell should lower the acquisition price to $28 per share in order to reduce the debt that Dell would have to raise.

That would make the deal less risky for banks offering the debt and "may be a necessary first step to restore credibility of the deal," Ghai wrote.

Tucci said Wednesday that the structure of the Dell sale remains sound, pointing to multibillion-
dollar breakup fees on both sides of the transaction and assurances from major banks that they can raise the debt Dell needs to complete the acquisition.

"We have a binding, solid merger agreement in place. We are highly confident," Tucci said.


Curt Woodward can be reached at curt.woodward@globe.com. Follow him on Twitter @curtwoodward.