Michael Dell ended months of speculation yesterday when he announced that his company, Dell Technologies, won’t pursue a full merger with VMware. The company will instead buy shares of VMware tracking stock and convert that into Dell Technologies’ stock. This allows Dell Technologies to go public again and VMware to remain, in the words of Michael Dell, “independent.”
“I am looking forward to VMware’s continued independent status, strategy, and capital allocation policy for organic investment, M&A, and shareholder returns,” Dell said in a statement.
In addition to being CEO of Dell Technologies, Dell is chairman of both the VMware and Dell Technologies boards. After the deal, he will continue as chairman and CEO and will own 47 percent to 54 percent of the newly public company. Meanwhile, Dell Technologies will own about 81 percent of VMware, with the remaining 19 percent being publicly traded.
Dell Technologies originally proposed combining with VMware back in February. A complete buyout of VMware, however, would have likely sparked an employee and shareholder revolt. But that option may still be on the table, according to some analysts.
“Dell will eventually consume VMware,” wrote BMO Capital Markets analyst Keith Bachman in a research note.
‘Least Offensive Solution’
Per the agreement, Dell Technologies will exchange each share of VMware tracking stock for 1.3665 shares of its Class C common stock, or $109 in cash per share not to exceed an aggregate amount of $9 billion. The cash part will be financed by a one-time $11 billion cash dividend pro rata paid to VMware stockholders.
Bachman wrote that VMware employees don’t want to work for Dell Technologies and “all employees we have spoken with have indicated they would want to leave VMware if Dell were the parent company.”
In light of this, the deal isn’t the worse option, he added.
“We think VMware’s issuing a special dividend is one of the least offensive solutions, although we would have preferred that VMware deploy its capital to its business rather than fund Dell,” Bachman wrote. “We also think VMware’s remaining a public company will help ease employee attrition. Finally, we think this special dividend is but one step in a journey, and we believe that Dell will eventually buy VMware.”
Deutsche Bank analyst Karl Keirstead said Dell Technologies “retains the right to pursue a business combination with VMware down the road,” but added that the dividend from VMware “makes this a highly unlikely event for the next several years.”
Will Shareholders Revolt?
Regardless of what Dell Technologies does down the road, the company still needs to convince shareholders to support the tracking stock buyout option.
Activist investor Carl Icahn, who tried to block Michael Dell’s 2013 effort to take his company private, owns a sizable stake in both VMware and the tracking stock. He is still considering pushing Dell for more money to make for less of a discount between the tracking stock and VMware’s publicly traded shares, the New York Post reports.
Another activist firm, Elliott Management, which is the fourth-largest shareholder of the tracking stock, declined to comment on the buyout, according to Bloomberg.