(Reuters) - Computer-maker Dell Inc struck a deal on Monday to buy data storage company EMC Corp for $67 billion, setting a record in the technology industry, as it tries to transform itself into a giant in the fast-growing market for managing and storing corporate data.
The acquisition, the year's third-largest in all sectors, highlights the frenzy of dealmaking sweeping the economy, as big or mature companies take advantage of low interest rates to buy rivals as a way to spur growth.
The deal should help privately held Dell, the world's No. 3 computer maker, diversify from a stagnant consumer PC market and give it greater scale in the more profitable and faster-growing market for cloud-based data services.
That desire to reach beyond PCs - whose growth has been stopped in its tracks with the rise of mobile devices - echoes moves by Dell's big rivals. Hewlett-Packard Co, the No. 2 PC maker, is splitting off its computer and printer unit this year to focus on the corporate data business. IBM Corp sold its PC unit a decade ago.
By combining Dell's server businesses with EMC's storage and virtualization assets, the new, enlarged company will have a broader range of products to challenge Cisco Systems Inc, IBM and Hewlett-Packard in the areas of cloud computing, mobility and cyber security.
"I don’t think either Dell or EMC were viable over the long run as a standalone; they really needed each other," said Eric Johnson, dean of the Owen Graduate School of Management at Vanderbilt University. "Dell was mostly on the consumer side, which is a terrible place to be. EMC had some enterprise products, but not the complete package."
The deal valued EMC at $33.15 a share as of the end of trading Friday. Dell will pay $24.05 per share in cash and will also give EMC shareholders a special stock that tracks the share price in VMWare Inc, the maker of cloud-based virtualization software majority-owned by EMC.
The stock market gave the deal a lukewarm response. EMC shares rose 1.8 percent to $28.36 after earlier jumping more than 2.5 percent. VMware shares plunged 7.8 percent to $72.48, decreasing the value of Dell's offer.
VMware will remain a publicly traded company. FBR Capital Markets analyst Daniel Ives said shareholders were concerned, however, that VMware would lose talented employees amid uncertainty about their future under Dell, eventually hurting the company's performance.
They are also worried that Dell's plan to create a VMware tracking stock will hit its price as the size of the float increases dramatically, he said. "This is a nightmare scenario for VMware shareholders. It ended badly for them, while EMC shareholders had a relatively good outcome," Ives said.
EMC's board has approved the merger and will recommend that shareholders do so as well.
The merger agreement includes a 60-day 'go-shop' provision that allows EMC to solicit bids from other parties and pay a discounted breakup fee to Dell if a deal is made with another company, as Reuters first reported on Sunday.
While IBM, Cisco, Oracle Corp and Hewlett-Packard could potentially be suitors for EMC, the chances of them challenging Dell with a rival offer are slim, people familiar with the matter told Reuters.
Activist hedge fund Elliott Management, which has a 2.2 percent stake in EMC and had been calling for a break-up of the company, welcomed the deal with Dell and said it was the best outcome for EMC shareholders.
"Elliott is pleased to participate in VMware's ongoing upside through the tracking stock, which will benefit from both meaningful synergies as part of Dell's organization as well as far greater liquidity than VMware shares have today," Jesse Cohn, senior portfolio manager at Elliott, said in a statement.
The deal will be financed through a combination of new equity from Dell's owners - founder and Chief Executive Michael Dell, its investment firm MSD Partners, private equity firm Silver Lake and Singapore state-owned investor Temasek Holdings - as well as the issuance of the tracking stock, new debt and cash on hand.
Michael Dell, with the help of Silver Lake, took the PC maker private in $25 billion deal two years ago.
The combined companies will have about $50 billion in debt, of which $32 billion is associated with the new transaction, plus an unspecified amount of refinanced EMC debt, according to two people familiar with matter, who asked not to be named as the information was not public. Dell's owners will invest more than $3 billion as new equity.
Dell first approached EMC in October 2014 following speculation over a deal between Hewlett-Packard and EMC collapsing and Elliott attacking the company, the source said.
Michael Dell then met EMC Chief Executive Joe Tucci at the World Economic Forum Annual Meeting 2015 in Davos in January, the source added. Negotiations between Dell and EMC intensified in the last two months.
EMC also published preliminary third-quarter earnings on Monday, saying it expected earnings excluding some items to be 43 cents per share, slightly below analysts' average view of 45 cents, according to Thomson Reuters I/B/E/S. It see third-quarter revenue between $6.05 billion and $6.08 billion, also slightly below analysts’ average view of $6.24 billion.
"This is a bittersweet announcement for me. I am incredibly proud of the business we have built here at EMC... But I also recognize the need for change, and size, coupled with focus of mission, and capabilities, matter!" Tucci wrote in a blog post on EMC's website.
The transaction is expected to close between May and October 2016, the companies said.
Morgan Stanley, Evercore Partners Inc, and Skadden, Arps, Slate, Meagher & Flom LLP advised EMC.
JPMorgan Chase & Co advised Dell and Silver Lake and was global financing co-ordinator, alongside Credit Suisse Group AG. Barclays Plc, Bank of America Corp, Citigroup, Deutsche Bank AG, Goldman Sachs Group Inc and RBC Capital Markets also provided financing.
Simpson Thacher & Bartlett LLP offered legal advice to Dell and Silver Lake. Wachtell, Lipton, Rosen & Katz is legal adviser to Michael Dell and MSD Partners.
Reporting by Greg Roumeliotis, Jim Finkle, Michael Flaherty and Liana B. Baker in New York; Additional reporting by Abhirup Roy and Devika; Krishna Kumar in Bangaluru; Editing by Bernadette Baum and Bill Rigby