Alongside the not-unexpected news that Dell would acquire EMC in a record $67.1 billion deal, EMC-controlled VMware released an early look at its Q3 results: The virtualization giant said it expects to post $1.672 billion in sales, with non-GAAP net income of $1.02/share. The market, at least initially, doesn’t look very impressed: shares of VMware dropped by as much as 10 percent in the wake of the news.
As part of the bigger enterprise IT Dell deal, EMC’s share of VMware — which itself has a market cap of over $33 billion — will transfer to the newly combined private business in the form of a tracking stock.
VMware will remain an independent and publicly traded business after the EMC deal is completed, the companies said today.
“VMware will remain a publicly-traded company and continue to provide customers value through leading software-defined data center technology, together with its cloud, mobile and desktop offerings,” Dell noted in a statement. “This transaction is expected to accelerate VMware’s growth across all of its businesses through significant synergies with Dell’s solutions and go-to-market channels. VMware remains committed to investing in and partnering with its strong, industry ecosystem.”
However, during the conference call today in the wake of the Dell/EMC news, Joe Tucci — EMC’s CEO who will step down — confirmed that Dell may intend to buy more of the company going forward.
“Michael [Dell, the CEO and chairman of Dell] intends to be a bigger owner of VMware over time,” Tucci noted during the call, also noting that Michael Dell has “some significant money set aside to make sure that he supports both the tracker and the common stock of VMware.”
Currently, EMC — which acquired VMware 2004 and subsequently spun it out in 2007 — owns around 80% of VMware. Around 65% of that will go to EMC shareholders as trading stock, and post deal, Dell would own about 28% of the economic interest in VMware, the company explained on the conference call today.
The price Dell pays for EMC, and its share of VMWare, will hinge on the value of the tracking stock, as Dell describes it:
Under the terms of the agreement, EMC shareholders will receive $24.05 per share in cash in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business. Based on the estimated number of EMC shares outstanding at the close of the transaction, EMC shareholders are expected to receive approximately 0.111 shares of new tracking stock for each EMC share. Assuming, for illustrative purposes, a valuation for each share of tracking stock of $81.78, the intraday volume-weighted average price for VMware on Wednesday, October 7, 2015, EMC shareholders would receive a total combined consideration of $33.15 per EMC share and the total transaction would be valued at approximately $67 billion. The value of the tracking stock may vary from the market price of VMware given the different characteristics and rights of the two stocks.
Today, VMware closed over 8% down at $72.15 per share.
Dell’s move to acquire EMC is a big move ahead in a wider consolidation play, where Dell continues to build both its hardware and enterprise IT businesses.
VMware says it expects Q3 sales of $1.672 billion, up 10% on Q3 a year ago. License revenues will be $681 million, up 7%. However, when considering revenues plus sequential change in total unearned revenues, growth numbers are more modest: they are expected to grow 3% year-over-year, the company said.
GAAP net income per diluted share is expected to be $0.60, up 35% year over year. Non-GAAP net income per diluted share for the third quarter is expected to be $1.02 per share, up 18% year over year. It will post full results on October 20.