Shares of VMware, Inc. VMW plunged 8.11% in yesterday’s trading session, following the news that its parent-company EMC Corporation EMC will be acquired by Dell Inc and Silver Lake.
This means that EMC’s stake in VMware (about 81% of the company) will be owned by Dell post the closure of this deal. VMware though, per the release, will continue to remain a publicly-traded company even after the acquisition.
An important thing to note here is that Dell will not be offering the regular trading stocks for VMware. Instead, the company will be issuing tracking stock that would reflect the performance of the trading stock. This will entitle EMC shareholders to have only economic interest in the trading stock but not own them (that is no voting rights or dividends). The absence of rights also makes some analysts speculate that the tracking stock might likely trade at a discount to the trading stock.
Most importantly, according to the deal, Dell will create tracking stock from 53% of the value of total VMware shares. Dell of course retains 80% of VMware shares and other shareholders the remaining 20%, which will be trading as usual for now.
This would also give the company an ability to raise its stake further in the future. In fact, with control of 80% shares, Dell can even buy out all of the shares of VMware, going ahead.
This has raised concerns among VMware’s investors as unlike EMC (which has been going downhill for a while), VMware had been performing quite well.
In fact, the company posted positive earnings surprise in the trailing four quarters. Even in its recently disclosed preliminary third-quarter 2015 results, the company revealed that it is set to exceed expectations on both counts.
Through the EMC acquisition, Dell would be able to get a significant control of VMware at a much discounted price. As a result, investors have become jittery regarding the valuation of the company.
Per the deal, Dell will be paying EMC shareholders $24.05 per share in cash and approximately 0.111 shares of VMware tracking stock.
VMware at present is a Zacks Rank #4 (Sell) stock. A couple of better-ranked stocks in the same space are Dassault Systemes SA DASTY and Majesco Entertainment Co. COOL, each carrying a Zacks Rank #2 (Buy).
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