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VMware and EMC shock everyone by launching a new company while Dell tries to buy them

Pat Gelsinger VMware
Pat Gelsinger VMware

VMware CEO Pat Gelsinger.

VMware reported its third-quarter results Tuesday and slipped in an announcement that surprised everyone.

VMware and its parent company, EMC are launching a new company called Virtustream, where both VMware and EMC own a 50/50 stake.

This is a cloud-computing company that will compete with Amazon, Google, and Microsoft, using EMC hardware and VMware software at its core, including cloud-management tech from a company called Virtustream that EMC bought last spring for $1.2 billion.

Essentially, VMware and EMC are taking their overlapping, competing products and services and combining them together into the Virtustream unit. These products include the Virtustream tech that EMC bought as well as VMware tech like vCloud Air.

Still, the new company at this juncture is really weird because last week Dell announced that it was acquiring EMC for a record-breaking $67 billion, including EMC's majority stake in VMware.

While the Dell-EMC acquisition won't be complete for months, most of this new company will wind up under Dell's umbrella, once it is complete. So to announce a new venture at this point is surprising.

Maybe the real point is to prove to VMware shareholders that Dell really will be hands-off with VMware. Dell even wrote a blog post Monday pledging not to muck up VMware.

Meanwhile, VMware's stock took a nose dive after Dell announced the acquisition.

That's a problem because Dell's agreement to buy EMC includes "tracking" stock to EMC shareholders to represent their VMware ownership. Dell was using the value of VMware shares to help boost its offer for EMC from about $24 per share to about $30 per share.

Investors still aren't thrilled with VMware. The stock has dropped 5% in after-hours trading.

As expected, VMware also reported a solid third quarter, beating on profits and revenue, thereby meeting its guidance for growth. VMware pre-announced its expected earnings last week when Dell and EMC announced the planned acquisition.

It reported third-quarter earnings per share of $1.02 and revenue of $1.67 billion — up almost 10% year-to-year.

Its guidance was for high-single to low-double-digit 2016 revenue growth, with Wall Street looking for 10.9%. It's fourth-quarter EPS guidance was $1.23 to $1.27, where analysts were expecting $1.23.

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