Dell-EMC Merger: Here’s What It Means for VMware (VMW) Stockholders

Dell-EMC Merger

If It Were Still a Public Company, Dell Stock Would Be Soaring Today

Trading activity in EMC Corporation (NYSE:EMC) skyrocketed on Tuesday after the company announced it would be acquired by Dell. If the privately held computer manufacturer was still a publicly traded company, then shares of Dell stock would likely have been trading higher following the announcement.

Dell’s proposed deal to acquire EMC Corporation is being touted as the move that’s set to give birth to the biggest privately held tech company in the world. The merger is going to create a one-stop shop of enterprise solutions, boasting one of the biggest portfolios of software and hardware infrastructure. All eyes are now glued to the EMC stock and Dell, the parties to the biggest tech merger of the year that will bring forth a competitor big enough to take on tech giant International Business Machines Corporation (NYSE:IBM).

Once closed, the deal will take EMC private, while VMware, Inc. (NYSE:VMW), a subsidiary of EMC, will continue to trade as an independent publicly traded company with Dell’s operational control and an economic interest of around 28%, serving as virtual public exposure for Dell.

What Does a Dell-EMC Merger Mean for VMW Stock?

VMware, a subsidiary with EMC’s present 80% economic interest, has taken the biggest hit from the merger news. VMW stock has been crippled in the last two trading days, plummeting more than 13% already and continuing to slide. The slump is indicative of a general disappointment of VMW stockholders for not getting a share out of the Dell-EMC merger. Also adding to the selling frenzy is a dilution of the stock. But the worst hit is purportedly coming from the short-sellers.

Now, Dell is going to finance the acquisition in parts, by cash, debt, and stock. The company has been able to raise $50.0 billion in debt financing for the leveraged buyout of EMC, and will be using the money to pay EMC stockholders, partly in cash and partly in a “tracking stock.” EMC shareholders are expected to receive $33.15 per share, according to Dell’s hypothetical calculations in its official press release.

Dell has decided to pay $24.05 in cash to EMC stockholders and an additional “tracking stock” equivalent to 0.111 parts of the presently traded VMware share. Dell has calculated the EMC payout based on VMware’s Wednesday intraday average price of $81.78, from which the stock has so far slid, coming in under $70.00.

It’s evident that the Wall Street traders are currently playing the market, longing EMC and shorting VMware. VMware is down to $69.24 and EMC is up to $28.35. Despite the massive slump, the current valuation will still generate $3.36 for each EMC share. As long as this arbitrage window stays open, VMware will continue to be exploited.

Here’s the Bottom Line for VMW Stock

As the saying goes, a great company doesn’t always translate into a great stock. Although, the Dell-EMC merger saga has left VMW stock brutally suffering at the hands of sellers, the company’s financials are still promising enough to make it a buy. VMW has a strong product portfolio, has historically beaten earnings forecasts, and is expected to do the same later this month when it posts its third-quarter earnings. The company has been contributing roughly 35% to EMC’s revenues, boasts an attractive balance sheet with no long-term debt, and had more than $2.0 billion in cash. Overall, its attractively low price multiples, including a price-to-earnings growth (PEG) ratio short of one, will eventually rejuvenate a buying interest in the company.

It remains to be seen whether the EMC-Dell deal will generate any positive synergistic value for Dell, but VMW’s stock crash has certainly opened a “buy low” window for long-term investors.

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