Yahoo Finance Repercussions of the DELL-EMC Deal
Why Investors Are Demanding Changes in the DELL-EMC-VMware Deal
VMware and EMC are tumbling
Dell’s acquisition of EMC for $67 billion has raised chaos among shareholders. In May 2015, EMC entered the cloud market by acquiring Virtustream in an all-cash deal of $1.2 billion to build its own hybrid solution. This move eliminates the need to maintain the server with AWS or any other third parties while moving its customers’ application to the cloud. The new cloud business be will equally shared by EMC and its subsidiary VMware.
Since Dell announced its EMC buyout on October 12, 2015, the prices of VMware and EMC have fallen by 30% and 9%, respectively. There are several factors that made investors a bit cautious and led to the fall in prices. One of the reasons could be the fact that VMware will be under the umbrella of Dell, which will own less than 30% of VMware. Another reason could be VMware’s announcement of the joint venture with EMC.
What investors are demanding
To resolve the situation, institutional investors have proposed the following changes:
VMware should repurchase shares worth $3 billion, which would reduce the floating shares in the market and in turn increase EPS (earnings per share).
EMC and VMware should withdraw the joint venture of Virtustream, given that VMware’s price has fallen since the announcement. This is damaging the implied value of the proposed stock, which Dell will use to pay for the deal.
Lastly, institutional investors have asked for an adjustment to the tracking stock rights. Tracking stocks are an equity offering issued by the parent company (Dell) to sell the minority interest in one of its profitable divisions (VMware) to the public.
It isn’t likely that Dell will meet investors’ demand for changes to the tracking stock, as any such changes would involve adjustments to the merger agreement.
The iShares North American Tech-Software ETF (IGV) has a portfolio of 62 stocks. IGV’s top four stocks are Microsoft (MSFT), Adobe Systems (ADBE), Salesforce.com (CRM), and Oracle (ORCL), which constitute 9.6%, 9.0%, 8.8%, and 8.1%, respectively, of the portfolio.
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