Dell-EMC deal difficulties: VMware and daddy postpone roadtrip

Sorry investors, we have to sort a Virtustream problem at home


The Dell-EMC acquisition was announced on 12 October this year, with Dell buying EMC along with its 80 per cent holding in VMWare.

Since the deal was announced, VMWare shares (VMW) have lost considerable value compared to EMC’s shares. Bernstein analyst Toni Sacconaghi thinks the EMC share price fall “can be attributed to the meaningful pull-back in VMW shares since the deal announcement."

If we chart both EMC and VMware stock prices over the last three months we can see how EMC shares have climbed and then fallen back, with VMware shares falling precipitately after the deal was announced.

EMC_3_month_share_price

Three-month view of EMC's stock price (Source Yahoo)

VMware_3_month_share_price

Three-month view of VMware's stock price (Source: Yahoo!)

If we compare the two stocks in one chart, then we can see the
disparity in share price performance more clearly. Source: Yahoo Finance

Part of the deal’s structure involves a 50:50 Virtustream joint venture between EMC and Dell, EMC having bought Virtuatream in May 2015.

Sacconaghi writes: “Several reasons have contributed to a decline in VMW's shares, the biggest of which we believe is concern over VMW's corporate governance under Dell. Specifically post-transaction, Dell would own <30 per cent of VMW economics yet control 97 per cent of voting power. This fear and uncertainty were exacerbated when VMW announced a dilutive Virtustream JV with EMC.”

The analyst notes that EMC and VMware have postponed a scheduled roadshow to update investors this week. He thinks “EMC and VMW are likely reconsidering the Virtustream joint venture (it has been announced, but not legally consummated) given the shareholder backlash and subsequent negative impact on VMW's shares.”

Another reason is this: “We suppose that EMC is approaching Dell/Silver Lake to see if they might consider changing any of the conditions/terms surrounding Dell's ownership of VMW and/or the tracking stock. With no credible deal alternative likely to emerge for EMC, Dell/Silver Lake's incentives are low, unless perhaps they can be convinced that doing so might improve retention of VMW employees, ultimately benefiting them in the process.”

Sacconaghi still thinks the Dell buy is a good deal for EMC investors, seeing prospects of competing bids being low and the possible tax hurdle a solvable problem.

Given our belief that the transaction is likely to close, we believe the risk-reward is favourable for owning EMC shares.

He writes: “On balance, we believe the Dell-EMC deal will ultimately close. Investors are unlikely to vote down the deal (we see downside to potentially $20 per share), the break-up fees are large ($4bn - $6bn for Dell; $2bn - $2.5bn for EMC) and financing is likely locked in. Additionally, we do not see a white knight for VMW assets given the tax ramifications for EMC.”

Watch this Virtustream space though. ®

Similar topics


Other stories you might like

  • Ex-Qualcomm Snapdragon chief turns CEO at AI chip startup MemryX

    Meet the new boss

    A former executive leading Qualcomm's Snapdragon computing platforms has darted the company to become CEO at an AI chip startup.

    Keith Kressin will lead product commercialization for MemryX, which was founded in 2019 and makes memory-intensive AI chiplets.

    The company is now out of stealth mode and will soon commercially ship its AI chips to non-tech customers. The company was testing early generations of its chips with industries including auto and robotics.

    Continue reading
  • Aircraft can't land safely due to interference with upcoming 5G C-band broadband service

    Expect flight delays and diversions, US Federal Aviation Administation warns

    The new 5G C-band wireless broadband service expected to rollout on 5 January 2022 in the US will disrupt local radio signals and make it difficult for airplanes to land safely in harsh weather conditions, according to the Federal Aviation Administration.

    Pilots rely on radio altimeter readings to figure out when and where an aircraft should carry out a series of operations to prepare for touchdown. But the upcoming 5G C-band service beaming from cell towers threatens to interfere with these signals, the FAA warned in two reports.

    Flights may have to be delayed or restricted at certain airports as the new broadband service comes into effect next year. The change could affect some 6,834 airplanes and 1,828 helicopters. The cost to operators is expected to be $580,890.

    Continue reading
  • Canadian charged with running ransomware attack on US state of Alaska

    Cross-border op nabbed our man, boast cops and prosecutors

    A Canadian man is accused of masterminding ransomware attacks that caused "damage" to systems belonging to the US state of Alaska.

    A federal indictment against Matthew Philbert, 31, of Ottawa, was unsealed yesterday, and he was also concurrently charged by the Canadian authorities with a number of other criminal offences at the same time. US prosecutors [PDF] claimed he carried out "cyber related offences" – including a specific 2018 attack on a computer in Alaska.

    The Canadian Broadcasting Corporation reported that Philbert was charged after a 23 month investigation "that also involved the [Royal Canadian Mounted Police, federal enforcers], the FBI and Europol."

    Continue reading

Biting the hand that feeds IT © 1998–2021