Silicon Valley Has Jus Arrived at a Major Turning Point

This year has been an unusual one for corporate finance–record M&A dealmaking, a drought in IPOs–but as 2015 wears on, things are starting to get downright weird.

The trend is especially noticeable in the tech industry, where startups have been shunning the IPO market for a few years, hoping instead to tap into mega-rounds of private financing. Only now are they moving into the IPO queue, with Square, Match Group and Atlassian aiming for IPOs by year’s end.

The trouble is, they are going public just as public investors are growing finickier. And that’s costing them potential capital. Square now plans to go public with a valuation of about $4 billion, down from the $6 billion valuation it enjoyed during its last private round a year ago.

Square is seen as a test case for other tech startups that will likely feel pressure to go public now that the private venture financing is starting to dry up. It’s already setting one not-so-great trend: marking down IPO prices below the exuberant private valuations. Tech companies that have fought for years to stay private may end up wishing they had gone public when the going was good.

Elsewhere, there’s a sense that companies are scrambling to do something–anything–to position themselves when the inevitable downturn hits. After years of arguing why it would never split up, HP did just that. HP now says severing itself in two is the best way forward. Even as two of its rivals–Dell and EMC–are moving in the exact opposite direction.

The whole tech sector, flush for years with confidence and talk of disruption, suddenly has an air of desperation about it. The Fed will raise interest rates soon, an incremental move that could have an outsize impact on investment strategies. Some tech startups are securing financing where they can, while others are trying to burn less cash. Tech giants are reorganizing, hoping to get a foothold in a promising market like cloud computing.

Nothing illustrates just how desperate tech companies are feeling these days than the ambitious merger of Dell and EMC. Valued at $67 billion when it was announced, the Dell-EMC will rank not only as the largest tech M&A in history but also the largest leveraged buyout ever staged to take a company private. To pull it off, the companies need to use creative financing – a polite way of describing a hairily complex deal.

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In addition to new equity from Michael Dell, EMC and Dell have lined up nearly $50 billion in loans from eight banks, an impressive accomplishment given the rising concerns in the corporate lending market and waning demand for high-yield debt tied to mergers. When Dell financed its buyout in 2013, it secured a 4.6% interest rate. Today, that rate could be as high as 7%. Like those tech IPOs, Dell and EMC may have waited too long to make their move.

EMC shareholders will get paid in cash as well as shares in a tracking stock of VMware, of which EMC owns 81%. The tracking stock is a controversial provision. It will be “linked to a portion of EMC’s economic interest in the VMware business.

Owners of the tracking stock won’t be able to vote and they won’t even own a piece of a company, but of an entity that mimics actual VMware shares. In effect, there will be two stocks for VMware, the one currently trading (and falling, since this deal was announced) and a virtual one given to current EMC shareholders.

Confused yet? An excellent (but long) explainer can be found on Andreessen Horowitz’ blog. There are plenty more details, but here is a simple test to gauge the complexity of a financial deal: Is it harder to explain to someone than the plot of Lost? The Dell-EMC merger is. It is much, much easier to explain what the Dharma Initiative did or what exactly that smoke monster was than it is to explain why a tracking stock for VMWare is necessary to help Dell sell cloud computing.

Which raises an interesting question about Dell-EMC. Why exactly does the deal need to be this complex? The apparent answer is to better position both companies in a competitive market for enterprise tech. But IT budgets have been dwindling, and cloud computing is favoring a select companies, like Amazon, Microsoft and Google.

Mega-mergers also distract companies for years while they integrate, a distraction that a more focused company like Microsoft doesn’t face. And there are bound to be layoffs. When Michael Dell and EMC CEO Joe Tucci announced the merger to EMC employees, Dell assured them, “that’s what this is all about, continuing the great innovations and success that you all have created.”

When, in a separate call with reporters that same day, someone asked about layoffs, Dell became both vague and tetchy. Layoffs would come in 2016, he said, lecturing reporters this was a “normal course of business.” Then Dell snapped at the reporter, “I think there’s some other companies in our industries that are maybe far better at reducing head count than we are. So maybe jump on their calls.”

Shareholders, meanwhile, aren’t thrilled with the deal either. EMC is down 10% since its announcement and VMware is down 23%. None of Dell’s potential rivals are inclined or able to wage a takeover battle, so the merger and buyout is likely to happen, barring any regulatory moves that could complicate it further.

So if no one but Michael Dell and Joe Tucci are thrilled with the deal, why is it happening? A clue can be found in the transcript of the announcement to EMC workers. After striding onto a stage, Tucci had a bizarre request. “I’ve never used a selfie stick… where’s that selfie stick?” As the two posed with another EMC executive, Dell had his own request: “Get the logos in here.”

That’s right. In announcing the largest tech M&A–and what may be the most complex in structure–the executives brought in a prop that is synonymous with narcissism and self-absorption. In front of employees who may be laid off in a few months–and who weren’t even in the selfie photo that the companies later tweeted.

And that image, as much as anything, shows just how weird things have gotten in the world of tech corporate financing this year.