Dell going public just got more interesting – dell technologies inc. (nyse dvmt) seeking alpha 4 other gases in the atmosphere


A few days ago, Dell announced that they were considering going public by exchanging its common stock, which is privately held by Michael Dell and private equity firm Silver Lake, for shares of the publicly traded tracker, Dell Technologies, class V ( DVMT). The tracking stock increased by 6% by market close, while VMware (NYSE: VMW) was up 1%.

A merger announcement that investors actually like has been rare this year, amidst many major acquisitions/mergers that resulted in share value tanking, and in some cases, new 52-week lows. Look at the Disney ( DIS)/Fox (NASDAQ: FOX) ( FOXA) merger (announced at $110/share, then fell to $96/share in the following months), or the Comcast ( CMCSA)/Sky ( OTCQX:SKYAY) bid (announced at $34/share, then fell to $30/share within two weeks).

However, in the Dell announcement, both the tracker and VMware rallied, which means that investors actually like this idea. In this article, we’ll be breaking down VMware’s confusing ownership structure, the options Dell has to go public, and how this new deal will impact investors. Dell And VMware’s Interesting (And Complicated) Relationship

When talking about Dell and VMware, there are actually three shareholders that need to be taken into account. VMware is a large, cash-rich software maker with a market value of $56 billion. Dell Technologies, class V, is the VMware tracking stock that was created as part of the merger of Dell and EMC (the stock is now valued at about $15 billion.) Then there’s Dell Technologies, the company controlled by Michael Dell and Silverlake that was taken private about five years ago in a leveraged buyout. Dell Technologies owns about 81% of VMware, or 32% excluding holdings through the tracking stock.

Please note, VMware recorded a $970 million charge related to the Tax Cuts and Jobs Act during the fourth quarter, with roughly $800 million related to the international portion of the company’s earnings and $167 million related to the remeasurement of deferred taxes. These charges were excluded from the non-GAAP numbers. This is why we see the EPS figure plummet on the Y-Chart, but this is temporary.

"Our non-GAAP tax rate for fiscal 2019 and Q1 ’19 is expected to be 16%, due to lower U.S. tax rates with the enactment of the Tax Cuts and Jobs Act. The lower U.S. tax rate on domestic earnings is expected to more than offset the increase in U.S. taxes on international earnings," said VMware CFO, Zane Rowe.

On the other end of the spectrum, we have Dell. In a recent earnings report, the company reported consolidated revenues of $21.9 billion, up 9 percent from the prior period. For the full year, consolidated revenue was $78.7 billion. Even though we saw some growth, overall results were disappointing – with an EPS of -$0.51, missing by -$2.16, and a revenue of $22.22B (+ 8.0% Y/Y) missing by -$450M.

Dell will go public, but leave VMware alone. The tracker trades at a large 46% discount to VMware because of concerns that Dell will try to break the link to VMware, but a deal by Dell to acquire the tracker will likely come at a premium to the current market price.

Now, Investors have four possible outcomes on the table: an IPO, a combination with VMware (from a few months ago), a combination with DVMT, or no action. The combination with DVMT now looks to be the most probable outcome. What This New Deal Means For Investors

VMware stock has been depressed by concerns about a Dell/VMware combination, but on this news actually rose 2% and closed up 1%. Now that Dell is considering a reverse merger with the tracking stock, VMware’s share value is no longer clouded over by this possible bad deal.

This means that we’re bullish on VMware’s share value, which has been trading at a discount to actual value due to these fears. If Dell continues to move towards the merger with the tracking stock, and not VMware, VMW’s share value should only go up.

Now a big issue is that the holders of the tracker stock have few legal rights and that Michael Dell could exploit this with a deal ( he has a history of making deals that rip off shareholders). However, if Mr. Dell does everything right, shareholders of the tracking stock should receive a premium, which is why the share price jumped a few days ago. The Four Outcomes

This is beneficial for everyone. VMware remains a cash-rich company without Dell. Tracking shares should move away from their 46% discount to VMware value. Dell IPO investors could be affected positively or negatively, depending on the valuation of the company.

Not a good idea for anyone but Michael Dell. VMware is now saddled with a highly leveraged and indebted Dell. Tracker shares could benefit or lose, depending on the terms of the deal, but knowing Mr. Dell’s track record, would probably be harmed by this. Mr. Dell wins, as he now controls VMware, an awesome company.

Dell has not determined which, if any, potential business opportunity to pursue and there can be no assurance that any potential business opportunity will be pursued, the terms thereof, or whether, if pursued, any such business opportunity would be consummated.

Whatever happens, there will be movements in share value regarding VMW and DVMT. We suggest that you closely monitor this situation, and any subsequent developments because you could see positive or negative price movements in the next few weeks if you are long in either stock. With the current heightened probability of deal #3 going through, we are bullish on VMware stock as they are trading at a discount because of merger fears. As these fears recede, share value should grow to fair value.