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Why VMware investors are wary of Dell's deals

The Lex Column
Updated

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Three sets of public shareholders have, in recent years, done deals with Michael Dell. A fourth would have been a charm. But that last group, VMware, understood the danger of sitting across a table from the Texas tycoon. On Tuesday (AEST), Dell announced a complex deal to list its shares again after going private in 2013. Dell will merge with a listed "tracking stock" subsidiary. This will create a new publicly listed Dell, whose equity value is roughly $US70bn. But merging with the high-flying software company VMware is not imminent.

Mr Dell's stake in his company was worth roughly $US4bn at the time of the management buyout from public shareholders. Today his stake is worth more than $US30bn. The crucial turning point in that value creation came from the second set of shareholders he dealt with. In 2016, Dell acquired the storage specialist EMC for $US67bn. EMC's key asset was VMware, which itself was listed but whose 81 per cent shareholder was EMC.

Dell could not afford to buy EMC all in cash. Instead, it gave EMC shareholders "tracking stock" to trace the value of VMware. The tracking stock proved to be a flop for EMC shareholders as it typically traded at a 40 per cent discount to standard VMware shares.

Michael Dell's stake in his company was worth roughly $US4bn at the time of the management buyout from public shareholders.  Michael Nagle

On Tuesday, Dell agreed to exchange its own shares for the tracking stock. This marks the third group of shareholders Mr Dell has cut a deal with. The price Dell offered was a 30 per cent premium to the tracking stock value. That looks juicy. However it reflects a 33 per cent discount to the standard VMware shares.

Dell naturally preferred a transaction that consolidated Dell, VMware and the tracking stock shares into a single company. But VMware shareholders rightly remain wary. The deal still leaves VMware shares outstanding even as Dell owns the majority of the company. VMware is a beneficiary of the hindsight of previous Dell dealmakers.

Financial Times

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