What Led to VMware’s Weak 2016 Guidance?
Gloomy 2016 Outlook Overshadows VMware's Good 4Q15 Results
Dell made the biggest buyout offer in technology space to EMC
In the prior part of the series, we talked about the new offerings that enabled VMware (VMW) to post double-digit growth in fiscal 4Q15 and 2015, respectively. In mid-August 2015, there was a rumor that EMC was considering a buyout by VMware, thus leading to a “downstream merger.” However, all these rumors were laid to rest when Dell made a $67 billion offer to acquire EMC (EMC).
Apart from being the biggest buyout the technology space has seen to date, the Dell-EMC deal was the largest North American M&A (merger and acquisition) deal in any sector in 2015. Prior to the Dell-EMC deal, HP’s (HPQ) acquisition of Compaq in 2001 was touted as the largest deal, as the below chart says. Facebook’s (FB) acquisition of Whatsapp in 2014 and Google’s (GOOG) acquisition of Motorola were some other notable acquisitions in the technology space.
Dell-EMC deal has put VMware’s prospects in jeopardy
EMC controls an 80% stake and 97% of the voting rights in VMware. However, this was before EMC agreed to become part of Dell. EMC sold approximately 50% of VMware’s stock to Dell as tracking stock with no voting rights. In its acquisition offer, Dell offered EMC shareholders approximately $24.05 per share in cash. It also offered $9.10 of tracking stock, which tracks the share price in VMware in relation to EMC’s share in VMware. As soon as the news regarding Dell and EMC broke out, VMware shares plunged by over 8% in October 2015.
Abhey Lamba of Mizuho Securities, stated, “We think the introduction of tracking stock combined with Dell’s purchase of EMC will be a negative for the stock.” Lamba further stated, “Our checks on VMW’s near-term business remain positive but the increase in effective float will likely have a negative impact on stock performance.”
Now Dell has a 28% share in VMware but with 97% voting rights, as the above presentation by Bloomberg View shows, whereas present VMware shareholders only have 19% ownership with voting rights amounting to 3%. It doesn’t require much explanation to understand that Dell’s majority of voting rights but less than 30% interest in VMware has heightened shareholders’ uncertainties regarding VMware prospects in 2016.
Investors who wish to gain broad-based exposure to VMware can consider investing in the iShares Russell 1000 Growth ETF (IWF). IWF has an exposure of ~13% to application software and invests ~0.04% of its holdings in VMW.
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