Half real, half virtual

19 July 2016 By Richard Beales

It’s fitting that VMware makes virtualization software. A new tracking stock to be issued to help pay for Dell’s acquisition of VMware’s controlling shareholder, EMC, will be a virtual creation. Disk storage maker EMC’s owners overwhelmingly approved the sale on Tuesday. Now it’s possible to figure out how much value they attach to the tracking stock.

Dell, the PC producer, and its investment partners agreed to buy EMC in October, in a deal valued at around $67 billion at the time. With the transaction now almost certain to happen, EMC’s market value is about $55 billion.

That valuation – equivalent to just over $28 per share – ought to represent the full value of the consideration that EMC shareholders will receive. They’ll pocket $24.05 a share in cash. The rest, roughly $4 a share, must be the price they’re putting on VMware tracking stock.

EMC owners are getting around 0.111 of a synthetic security for each of their shares. So the implied value of a VMware tracking share is just over $36. The conundrum is that VMware’s actual stock changed hands above $68 per share as of Tuesday at noon. The virtual stock looks as if it will fetch barely more than half the price of the real one.

Since the deal was announced, EMC and VMware stock prices have danced around, at times making the tracking stock look essentially worthless, assuming the deal was certain to happen. Most such trading quirks should now be history. The only logical explanation is that investors value the tracking securities far less highly than real thing.

Their reasoning is sound. Denali – Dell’s parent – will issue the tracking stock, not VMware. Even though each share is supposed to represent an economic interest similar to an actual VMware share, the exposure will be contractual, not direct.

The new publicly traded tracking stock will also represent 53 percent of VMware’s total share count. Only 19 percent of the company’s actual shares are available on the market. The much bigger free float of tracking stock may complicate the interplay of virtual and real share prices.

A track record may help the hefty-looking discount narrow over time. For now, though, EMC owners don’t seem comfortable with their virtual slice of VMware.


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