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Photographer: Joe Raedle/Getty Images Photographer: Joe Raedle/Getty Images

Dell Inc. is in talks to combine with EMC Corp., people with knowledge of the matter said, in a deal that would help the companies cater to more customers and cope with a slowdown in demand for computers and storage equipment.

The deal may be completed as soon as next week, said two of the people, who asked not to be identified discussing private matters. Dell is speaking to banks about raising at least $40 billion to finance the purchase, said one person. JPMorgan Chase & Co., Barclays Plc, Bank of America Corp., Credit Suisse Group AG and Deutsche Bank AG are among banks that have been approached about financing the deal, people said.

As part of the transaction, Dell would acquire EMC’s controlling stake in VMware Inc., said two of the people. The deal would involve taking EMC private, while leaving VMware’s shares publicly traded, they said. Dell may sell off some of EMC’s VMware shares in order to raise money, said one of the people. While negotiations are far along, they still may not result in a deal, the people said.

EMC and Dell both need ways to manage a slump in their main businesses, with EMC weighing strategic options amid pressure from shareholder Elliott Management Corp. Though the combination would be costly and difficult to finance, it would create a computing colossus that combines EMC’s leadership in digital storage with Dell’s share of the market for servers, which help businesses tackle mammoth computing tasks.

“Would Dell be interested in EMC? Why not?” Joe Wittine, an analyst at Longbow Research, wrote in a research note. “From the perspective of the world’s largest PC company, a bigger enterprise portfolio is alluring, particularly one that has made the big bets on IT’s transformation ahead of time.”

Tucci Succession

The enlarged business could also gain access to VMware’s valuable software, which is used to more efficiently manage server-laden data centers. For EMC it would solve the longstanding challenge of finding a successor for CEO Joe Tucci, who was supposed to step down in February. EMC, which has acknowledged it needs to take steps to boost shareholder value, held merger talks with Hewlett-Packard Co. last year, people familiar with the matter said at the time.

The current plan would have Michael Dell run the combined entity, said one of the people. Talks are further along than those between EMC and Hewlett-Packard a year ago, the person said.

EMC shares rose 4.7 percent to $27.18 at the close in New York. VMware fell 5.8 percent to $77.30.

One of the biggest hurdles is how Dell would finance the acquisition. Taken private in 2013, Dell has about $12 billion in debt, according to analysts. EMC’s market capitalization is about $52 billion, reflecting the VMware stake.

Dell is weighing an offer of more than $27 a share, CNBC reported, without disclosing the source of the information.

Less Scrutiny?

Taking EMC private would let the company invest in new businesses and rejigger its aging ones without the scrutiny and pressure of investors, said a person familiar with the company’s thinking. EMC sees the future of the enterprise technology market as one where servers and storage are sold together as integrated packages of hardware and software, and the deal would create an entity that could provide such products using EMC’s strength in storage and Dell’s in servers, said the person. It also improves EMC’s ability to sell products into the midmarket, where it has generally been weaker.

Pressure on EMC has emanated from Elliott, which succeeded in adding two members to EMC’s board in a standstill agreement that ended in September. EMC shares had declined 13 percent this year through Wednesday. Dell was taken private in a deal worth about $25 billion in 2013.

Dave Farmer, a spokesman for Hopkinton, Massachusetts-based EMC, and David Frink, a spokesman for Round Rock, Texas-based Dell, declined to comment. Representatives from Bank of America, JPMorgan, Barclays, Credit Suisse and Deutsche Bank also declined to comment.

Competitive Pressures

For Dell, a combination with EMC could bolster its storage revenue as it competes against Hewlett-Packard and other rivals. It’s also facing competition from cloud-computing providers such as Amazon.com Inc. and Google Inc. At the same time, Dell is facing sagging personal-computer demand. Global PC shipments fell 7.7 percent in the third quarter, hurt by a slowdown in desktop demand and the strength of the U.S. dollar, market researcher Gartner Inc. said Thursday. That followed a 9.5 percent decline in the prior period.

“We see increased scale as the main benefit from a combination,” Jefferies analysts wrote in a note. “Dell and EMC are increasingly competing with the likes of Amazon, Google, Microsoft, and others that have deep pockets; becoming larger would make Dell and EMC of greater strategic importance to their customers.”

EMC is facing a waning market for its older, pricey storage models. While the company has been focusing on newer products such as flash arrays that speed up data retrieval, where it’s growing more rapidly, that hasn’t been enough to lift sales growth. EMC’s revenue is projected to expand 3 percent this year, the slowest rate of growth since a decline in 2009, according to data compiled by Bloomberg.

Head Scratcher

Tucci, who has announced plans to retire before only to let the deadlines come and go without a move, has said the company is looking at internal candidates. While a deal could answer the succession question and give EMC shareholders a payoff, some analysts questioned the logic, with Daniel Ives at FBR Capital Markets calling it a “major head scratcher.”

“It would be a very financially complex merger, high integration issues, and fundamentally would combine two very mature companies into one,” Ives said. “Of all the options potentially on the table for Joe Tucci and EMC, this would be not ideal in the eyes of the Street. It would add more maturity to an already elderly EMC.”

This isn’t the first time Dell has considered a combination with EMC. Former Dell CEO Kevin Rollins tried to convince then-Chairman Michael Dell to agree to such a deal in the last decade but Dell declined, Rollins has said. Dell also had a deal in which it resold EMC storage but ended that in favor of its own products.

Some analysts expressed confusion about the reported agreement, with JPMorgan’s Rod Hall saying in a note that it didn’t make a lot of sense.

Still, EMC must do something, said Ives.

“EMC is getting major heat from activist shareholder Elliott to make a move in the next few weeks, otherwise a proxy battle could be in store,” Ives said. “Coupled with current CEO Tucci on the edge of retirement, the clock is about to strike 12 and EMC needs to make a move after years of the status quo.”

(Updates to add Deutsche Bank in second paragraph.)