Nearing the End for EMC Stock
The Chinese government has finally given its blessing for the union of EMC Corporation (NYSE:EMC) and Dell Technologies Inc (OTCMKTS:DVMTV), paving the way for the biggest tech merger in history. Dell’s $60.0 billion acquisition of EMC stock is now final.
The deal is set to close on September 7. (Source: “Historic Dell and EMC Transaction Set to Close on September 7, 2016,” U.S. Securities & Exchange Commission, August 30, 2016.)
Since Dell is a private company, EMC stock will stop trading on the New York Stock Exchange after the ink is dry. That said, investors still have an opportunity to profit from this historic deal.
We know that Dell is paying $24.05 per share of EMC stock, but that raises the question: why is EMC stock trading at $28.92? It doesn’t make sense. The deal is almost a week from closing, which means that EMC stock should be at, or near, its sale price.
I combed through the details to find out why investors were turning so bullish on EMC stock. What I found is incredible. In addition to the cash payout, EMC stockholders will receive a “tracking share” that is linked to the firm’s “economist interest in the VMware business.”
That’s why EMC stock is hitting new 2016 highs.
The company’s 80% stake in VMware, Inc. (NYSE:VMW) is absolutely critical to the value of EMC stock. Dell is absorbing that ownership stake, but it is also creating a new asset that reflects the growth of VMware and Dell’s combined business.
This tracking share will start trading right as EMC stock stops. It will trade under the ticker symbol DVMT and will be open to all investors, including retail investors. Each tracking share will be worth approximately 0.111 of EMC stock.
This effectively means that anyone with EMC stock today will own some DVMT stock by the middle of next week. It is a way of getting in while the price is still cheap.
EMC Stock = DVMT Stock
Michael Dell, the founder of Dell Technologies and current chairman and CEO, has previously said that VMware is central to his strategy. He intends to keep the company as is, but use its corporate relationships to push Dell’s cloud services.
At present, VMware has tendrils extending into all corners of the corporate world. I’ve seen reports that say 99% of the Fortune 500 companies use VMware software to run multiple operating systems simultaneously. (Source: “Private Clouds a ‘Big Priority’ for Dell,” The Wall Street Journal, August 29, 2016.)
That’s a lot of potential business for Dell.
“This is an historic moment for both Dell and EMC. Combined, we will be exceptionally well-positioned for growth in the most strategic areas of next generation IT including digital transformation, software-defined data center, converged infrastructure, hybrid cloud, mobile and security,” said Michael Dell. (Source: U.S. Securities & Exchange Commission, op cit.)
“Our investments in R&D and innovation, along with our 140,000 team members around the world, will give us unmatched scale, strength and flexibility, deepening our relationships with customers of all sizes.”
So in other words, current holders of EMC stock would get an immediate return for their shares, alongside a tracking share which could surge in price. Dell intends to leverage VMware as much as possible and, in doing so, ultimately challenge Amazon.com, Inc.’s (NASDAQ:AMZN) dominance in the cloud computing race.
After all, in terms of revenue, this merger will make Dell Technologies a leading hardware supplier to cloud-computing providers.
“I am proud of everything we’ve built at EMC – from humble beginnings as a Boston-based startup to a global, world-class technology company with an unyielding dedication to our customers,” said Joe Tucci, chair and chief executive officer of EMC. “The combination of Dell and EMC creates a new powerhouse in the industry – providing the essential technology for the next era in IT.”
To summarize: EMC stock is trading above its acquisition price because the buyout comes with a tracking share. This tracking share could be super-valuable because it is linked to VMware, a company which makes software used by 99% of Fortune 500 companies. EMC stockholders are getting a portion of newly issued DVMT stock.
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