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VMware, Inc. Message Board

  • tech_trader8888 tech_trader8888 Sep 10, 2007 8:05 PM Flag

    why has EMC not risen nearly as much?

    who has a rational explanation for why EMC is not rising as much as VMW? Here is some info I found from Barron's. It mentions EMC at the end.

    VMware Soars; VMworld Trade Shows Opens
    Posted by Eric Savitz
    Whoa, have you looked at VMware (VMW) shares this afternoon? The stock is soaring ahead of the opening of the company’s VMworld trade show tomorrow in San Francisco.

    VMware issued a flurry of press releases today; it is a little hard from where I sit to tell which of them (if any) has the stock rolling.

    There’s a release on desktop virtualization.
    One on disaster recovery.
    Another announces its next generation hypervisor software. (The hypervisor is the layer of software that sits underneath the various individual instances of operating system software on a virtualized server. Ye gads, I sound like I work for Network World.)
    And another release sums up all the other releases.
    VMware today is up $8.44, or 12%, to $77.94. That boosts the company’s market cap to nearly $26 billion. That noses the company past Adobe (ADBE) - market cap, $25.5 billion - to become the second biggest Silicon Valley-based software company by market valuation, trailing only Oracle (ORCL).

    Shares of EMC (EMC), which owns 86% of VMware, are up just 22 cents, or 1%, at $19.19; which is a little baffling; it suggests EMC shareholders are more skeptical about the value of the VMware stake than VM holders are.

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    • Very simple. Traders are going long EMC and shorting VMW, believing it makes sense to be long the value stock, emc.

      However, the low float in VMW is therefore causing a short squeeze. These traders then have to cover their vmw short and sell their EMC stock.

      Pretty simple.

    • This obvious mispricing reminds me of the 3Com's spin-off of Palm back in 2000. (EMC/VMware mispricing is not yet as absurd as 3Com/Palm, but getting there.)

      See this article:

      Here is the relevant portion:


      A third example of clear overpricing comes from 3Com/Palm, which I studied with Richard H. Thaler.(6) In this case, the driving force is not fraud but rather overoptimistic investors. Again, having some investors overoptimistic is not a problem, as long as there are more rational investors who can correct their mistakes by short selling. But add overoptimistic investors and short sale constraints together, and the result is overpricing.

      On March 2, 2000, 3Com (a profitable company selling computer network systems and services) sold a fraction of its stake in Palm (which makes hand-held computers) to the general public via an initial public offering (IPO) for Palm. In this transaction, called an equity carve-out, 3Com retained ownership of 95 percent of the shares. 3Com announced that, pending an expected IRS approval, it would eventually spin off its remaining shares of Palm to 3Com's shareholders before the end of the year. 3Com shareholders would receive about 1.5 shares of Palm for every share of 3Com that they owned.

      This event put in play two ways in which an investor could buy Palm. The investor could buy (say) 150 shares of Palm directly, or he could buy 100 shares of 3Com, thereby acquiring a claim to 150 shares of Palm plus a portion of 3Com's other assets. Since the price of 3Com's shares can never be less than zero (equity values are never negative), the price of 3Com should have been at least 1.5 times the price of Palm.

      After the first day of trading, Palm closed at $95.06 a share, implying that the price of 3Com should have been at least $145 (using the precise ratio of 1.525). Instead, 3Com fell to $81.81. The "stub value" of 3Com (the implied value of 3Com's non-Palm assets and businesses) was minus $63. In other words, the stock market was saying that the value of 3Com's non-Palm business was minus 22 billion dollars.

      This example is puzzling because there is a clear exit strategy. This spin-off was expected to take place in less than a year, and a favorable IRS ruling was highly likely. Thus, in order to profit from the mispricing, an arbitrageur would need only to buy one share of 3Com, short 1.5 shares of Palm, and wait six months or so. In essence, the arbitrageur would be buying a security worth at worst worth zero for -$63, and would not need to wait very long to realize the profits. If one had been able to costlessly short Palm and buy 3Com, one could have made very substantial returns. This mispricing was possible because shorting Palm during this period was either difficult and expensive, or (for many investors) just impossible.

    • There are several possible reasons. One, owning a % of vmw does not directly translate to increased revenues for emc. How is emc going to treat revenue/earnings on its books? EMC is a data storage co. and derives most of its revenue from such. EMC is a co. that brought in 12b in revenues over the last year. It also trades 40m shares a day. In essence, you have a company 10x the size of vmw, yet at current stock valuations, vmw accounts for close to half of the market cap of emc. How do you value such a company. What can/will emc do with vmw. It definitely adds worth, but in terms of revenues, less than 10%. So, does that help?

      • 4 Replies to fogcutr
      • This is wrong. EMC owns a controlling stake in VMW, and VMW's results will be reflected on EMC's financial statements. It is puzzling why EMC has not seen the same price appreciation.

      • Basically, I think EMC is not going up simply because they get a fixed price when they sold off the VMW shares. Sure, they are gaining "paper profits" but that doesn't hit their "investment earnings" on the financial reports unless EMC sells their shares too.

        Let's face it, if word on the street is that EMC is selling off more of VMW, the investors would say "Why? Why? Sell!!!".

        Just my opinion...

    • Too difficult to manipulate bloated floats like EMC.

    • Why hasnt INTC, MSFT, SUNW, ORCL????????

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