EMC Converts $400M Worth of Pivotal Debt into Equity
Pivotal, the software and data analysis firm controlled by the storage company EMC, raised $653 million in a recent Series C funding round, according to Form D filing with the Securities and Exchange Commission. However last week, the company originally said it raised $253 million from Ford Motor Co. and new investor Microsoft in the funding round. What is the explanation of this massive $400 million gap then?
Before uncovering the source of the extra money, let us explain the corporate’s structure to back up the story. Pivotal was founded in 2013 with EMC and VMware owning 69% and 31% of the stakes respectively. Very soon thereafter, General Electric (GE) bought a 10% stake for $105 million and EMC and VMware (EMC owns slightly less than 81 percent of the equity) owned 62% and 28% respectively. As of March 31st, EMC controls 83% of the economic interest in Pivotal, according to its most recent quarterly filing with the Securities and Exchange Commission.
Now, let’s go back to the whopping difference. Turns out, EMC, who is dealing with the biggest ever technology takeover by Dell, divesting $67 billion in assets, increased its already considerable stake in Pivotal by converting $400 million worth of Pivotal debt into equity. Which escalates another question: Why would EMC do this? There is no official comment from both company executives, other than a Pivotal spokesman’s brief response:
“At this point in its development, Pivotal, a three-year-old company with strong financial and customer momentum, now has no long-term debt, strategic investors, and significant cash.”
It seems like, with the contribution of new investments from Ford and Microsoft, EMC might want to maintain its control of Pivotal as a profitable Pivotal IPO could diminish a substantial amount of debt, approximately $50 billion due to the Dell-EMC merger. After all, both Executive Chairman of the Pivotal Board, Paul Maritz and EMC CEO Joe Tucci have been studying a plan to float Pivotal as a IPO at some point, which is not always the best plan on Wall Street as Dell separated SecureWorks last month in an IPO that couldn’t catch its targets and has been valuing below its IPO price ever since.
Eventually, both EMC and VMware will become one under the new Dell Technologies banner once the largest deal in tech history is finalized.
Last week when Michael Dell was announcing “Dell Technologies” as the new identity for the EMC-Dell merger at the opening ceremony during the EMC World 2016, he also noted that Pivotal would keep its branding and independent status after the acquisition.
According to Pivotal, Palo Alto-based cloud and Big Data software business employs 2,000 personnel in 17 offices and posted a first-quarter revenue of $83 million. Pivotal is a cloud software company that helps its customers build up their own software development capabilities and offers tools & services to support those efforts.
Ford has been Pivotal’s client and now will captivate its technology to create and run software related to its connected car applications. The reason the investment from Ford, is in relation to U.S. automakers’ intensifying competition to improve their technology in order to make self-driving cars. On Wednesday, Fiat Chrysler Automobiles said it plans to produce 100 minivans next year using technology from Google.
GE was an early Pivotal investor, contributing $105 million into the company in 2013. The industrial giant claims its software affiliation with Pivotal allows them to amplify more efficient ways to analyze how its jet engines consume fuel. Those findings ultimately help airlines reduce their fuel costs.
The reason of the investment by Microsoft is related to the demand from its customers as they believe Pivotal offerings could help them leverage their businesses. One of its high-demanded products is Cloud Foundry, acquired from VMware, as it is a service for deploying and managing software on Microsoft's Azure cloud computing platform.
Although the interdependent corporate structures are always complicated and hard to figure out, it seems like EMC is willing to swap debt for equity which tells us that the company has faith in Pivotal, which greases the skids for a Pivotal IPO in order to take the edge off the debt burden.