VMware, Inc. VMW it seems is trying its best to pacify investors as the acquisition of its parent company EMC Corporation EMC by Dell approaches. According to a Bloomberg report, VMware is planning to buy back a huge number of shares (possibly in multimillion dollars).
VMware has been going downhill since the news of the EMC-Dell merger came out. In the last three-month period, the company lost over 25% of its market cap in contrast to the S&P 500 index’s gain of over 6%.
Investors have become jittery regarding the valuation of the company. Following the spin-off of EMC’s stake in VMware (about 81% of the company), it will be owned by Dell. Additionally, according to the deal, Dell will create a tracking stock from 53% of the value of total VMware shares. Dell will retain 80% of VMware shares and other shareholders the remaining 20%, which will be trading as usual. Through the EMC acquisition, Dell would be able to get significant control over VMware at a much discounted price.
The decline in share prices is a significant concern for management as this is lowering per share sale price for EMC investors from the earlier expected $33.15 to $30.61 (considering closing price of Dec 4).
Therefore, the aforementioned buyback plan is likely an attempt to regain investor confidence. In addition, the company is also reconsidering the ownership structure for Virtustream, a leading hybrid-cloud product company that was acquired by EMC earlier this year for $1.2 billion.
Earlier, EMC had announced its plans to spin out Virtustream following the acquisition. The new company was expected to be owned jointly by EMC and VMWare with each having a 50% stake. However, a Reuters report last week stated that the company is now re-evaluating this ownership structure and might even consider consolidating Virtustream’s results within EMC, thereby foregoing the 50-50 partnership plan.
We believe that VMware shares would likely benefit from the buyback and its dissociation from the loss-making Virtustream business.
The EMC-Dell deal is deemed to be the largest technology acquisition ever with a value of nearly $67 billion.
Currently, VMware has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same space are Autodesk, Inc. ADSK and Cadence Design Systems Inc. CDNS, each sporting a Zacks Rank #1 (Strong Buy).
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