Yahoo Finance Dell's tracking stock offer for EMC disappoints
Long suffering shareholders of EMC (EMC) have been hoping for years for a transformative merger or restructuring to bail out their investment.
But there's some disappointment that the deal that has finally materialized, a supposed $67 billion buyout offer from Michael Dell, in part relies on tracking stock, a much-hated Wall Street financial engineering tactic with a mixed history.
EMC officials said the Dell offer should be valued at $33.15 per EMC share, but the stock rose less than 1% to $28.07 in midmorning trading, reflecting the disappointment. Shares of VMWare (VMW), the software company 80% owned by EMC, fell 10% to $71.
Dell said it would pay $24.05 in cash for each EMC share. The remaining $9.10 of the announced $33.15 offer comes in the form of a tracking stock linked to part of the value of the 343 million shares of VMWare that EMC currently owns. The new shares will not be actual common stock of VMWare, however, but issued by Dell, a private company, to track or represent 65% of the value of the 343 million shares. EMC shareholders will get tracking stock representing 0.111 shares of VMWare for each EMC share they own.
Boards of the companies involved have already approved the offer but EMC shareholders still have to vote to approve it. The companies said they expected the transaction would close by the middle of 2016.
Michael Dell is no stranger to controversial acquisitions, of course. Dell investors, including billionaire Carl Icahn, opposed Dell's $25 billion deal to take his namesake PC company private in 2013, but shareholders ultimately voted to approve the transaction.
EMC shares have performed poorly for years as pressure mounted on the leading maker of network storage equipment from upstarts with faster technology and cloud service providers urging big companies to abandon buying their own equipment altogether. EMC's revenue increased just 5% last year, down from 7% growth in 2013 and 9% in 2012, according to data from Morningstar.
Tracking stock history
On Monday, several analysts questioned Dell's proposed tracking stock structure on a call with EMC and VMWare top executives. EMC CEO Joe Tucci asserted that the new tracking stock would trade closely to the price of VMWare common stock because VMWare is already a public company with a long public history. "This should be the best trading tracking stock ever," he said.
Despite the poor reception in the market, Elliot Management, the activist hedge fund that has been pressing EMC to make a deal since last year, issued a statement strongly backing the Dell offer. "This landmark transaction will create a powerhouse with leading franchises across enterprise IT," Jesse Cohn, senior portfolio manager at Elliot, said in a statement. The firm said it owns 2.2% of EMC shares.
In the past, tracking stocks have often performed poorly, particularly when they were linked to the performance of non-public companies. In one well-known case, Walt Disney (DIS) issued tracking shares in its Internet unit, Go.com, in 1999 but had to undo the deal two years later amid a collapse in the tracking stock's price. Concerns about tracking stocks prompted cable pioneer John Malone to abandon an attempt to issue tracking stock from Liberty Media (LMCB) last year. He spun off some assets into a separate company instead.
Tracking stocks on average significantly underperformed the stock market for the three years after being issued, according to a 2004 study by professors at the University of Iowa and Indiana University.
The Dell-EMC deal includes a provision that allows EMC to seek a better offer, a so-called go shop clause, for the next 60 days. Analyst Kulbinder Garcha at Credit Suisse said a better deal could materialize from Hewlett Packard (HPQ), after it splits up next month, or Cisco Systems (CSCO). "HP Enterprise could become again interested, and we continue to believe a Cisco-EMC combination would create an IT powerhouse," Garcha wrote in a report on Monday.
