As the company evolves from primarily an on-premise virtualization service provider to a cloud computing vendor, it could continue to capture a significant portion of the addressable market. VMware has a strong global customer base with market leading positions in key market domains including server virtualization, software-defined networking and hybrid cloud computing. However, we believe that VMware’s long-term growth prospects are likely to be unaffected by its parent company being acquired by Dell. VMware’s stock price further fell to $69 after markets opened on Tuesday. VMware’s shareholders reacted negatively to the acquisition news, with its stock falling by about 12% to about $70 before open on Monday before recovering slightly to $72 by the end of the day. Moreover, having a close relationship with Dell could impact how competing IT firms sign enterprise license agreements with VMware. The introduction of the tracking stock adds liquidity and volatility to VMware’s shares, which could have a dilutive effect. Moreover, Dell can now offer integrated IT offerings to enterprise clients with EMC’s data storage, content management, data security and cloud foundry offerings under its belt.Īt the moment, Dell does not intend to sell VMware stock to finance the the transaction. Comparatively, IBM and HP hold a 10-11% share in the external disk storage systems market. EMC is a clear leader in the storage systems market, commanding a nearly 30% market share in worldwide factory sales of external storage systems, which Dell can add to its 6-7% share in the market. Some reports indicate that Silver Lake approached Lenovo, Hewlett-Packard and Huawei to possibly sell off Dell’s PC business in order to help finance the deal.Īcquiring EMC’s data storage and related businesses makes sense for Dell to help it compete directly with HP and IBM. Funding for the EMC acquisition will partially come from EMC’s cash on hand (about $5.8 billion at the end of Q2) and additional common equity from Mr Dell, Silver Lake and other partners including MSD Partners and Singapore-based investment firm Temasek. Silver Lake and Temasek will contribute an additional $3.5 billion to help pay for the equity portion of the deal. Private equity firm Silver Lake was instrumental in helping Dell go private in a $25 billion buyout back in 2013. After the Dell announcement, Elliott Management released a statement supporting the merger. The agreement expired in September, after which fresh speculation began. In return, two new directors were appointed on EMC’s board with support from Elliott Management. After months of speculation, EMC and Elliott management came to a standstill agreement in January, under which the latter agreed to refrain from publicly putting pressure on EMC to spin off VMware. According to Tucci, it made sense for EMC to continue as a federation since it can offer better products and services to big customers with integrated offerings from VMware and Pivotal. On the other hand, EMC's CEO Joe Tucci stuck to the "federation" business model, wherein some of the acquired companies operate as separate entities, while they still collaborate on products for large clients. The activist investor group constantly pushed EMC’s management for structural changes to aid shareholders. Key investor Elliott Management had taken a stake of over $1 billion in EMC, making it one of the top five institutional investors. The Role of Silver Lake, Elliott Management And Other PartnersĮMC faced pressure from large institutional investors in mid-2014 to spin off some of the fastest-growing businesses within the company such as Pivotal. EMC’s stock price fell by about 20% since the beginning of the year, before rallying by 15% this month. We have a $29 price estimate for EMC, which is in line with the current market price. Mr Dell and the consortium of investors would own about 70% of the combined company's equity after the completion of the deal, excluding VMware’s tracking stock. Dell will add almost $50 billion in debt to go through with the acquisition. Moreover, the combined company will focus on de-levering over the next 18-24 months following the closure of the deal. Dell maintained that the acquisition would not have a negative impact on Dell’s credit ratings. Michael Dell, founder and CEO of Dell Inc, will head the combined entity after the deal closes. As a result, the total combined purchase price stands at $33.15 per EMC share, taking the total value to $67 billion. For each EMC share, shareholders will receive about 0.111 shares of VMware’s new tracking stock (note: VMware’s stock was trading around $78-82 through the week prior to the announcement). EMC shareholders will receive $24.05 per share in cash in addition to a tracking stock related to VMware. Storage giant EMC signed a definitive agreement with Dell under which the latter will acquire EMC for $67 billion, with EMC-owned VMware remaining a publicly traded company.
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