Hype―and Skepticism―Remains for Dell’s Return to the Public Market

Austin—The possibility that Dell might return to the public markets has been talked about for months, if not longer. It became more realistic in February, when the Round Rock, TX-based company told securities regulators it was considering a public offering or a reverse merger with VMware, the publicly traded company of which Dell owns 81 percent.

The news last week that Dell plans to return to the public market by buying out a tracking stock that’s linked to VMware, DVMT, which was issued when Dell acquired storage giant EMC in 2016, was well received by stockholders and the rest of the market. Shares of the VMware-tracking stock (NYSE: DVMT) hit a high of $94.83 per share as of July 3, up 12 percent from its closing price on June 29, before settling into the mid-$93 range during the last week.

VMware (NYSE: VMW) similarly gained 10 percent between June 29 and the deal’s announcement on July 2, upping its price to a high of $162.02. It appears that big shareholders are content with the deal: Billionaire activist investor Carl Icahn is profiting to the tune of about $200 million from the shares he holds in DVMT and VMware, and isn’t expected to try to fight for a better deal, The Wall Street Journal reported.

And Michael Dell, the Dell founder who first took the company public when he was in his 20s, is the biggest winner of the transaction, according to a Bloomberg report. Dell will now own about half of the company, and he and Silver Lake Management, which helped him take Dell private in 2013, will be able to control voting rights, Bloomberg reported.

The capital structure of the new company leaves nothing to chance for Dell, according to The Financial Times, and could help the company better compete with other giants like IBM and Hewlett Packard Enterprise. Analysts from Deutsche Bank to Cowen praised the deal, according to MarketWatch.

Dell is offering holders of the tracking stock (which is currently known as a class V share of Dell’s common stock) the ability to convert their holdings of the stock into class C shares of common stock (1.3665 shares of class C stock for every tracking share), which will be traded on the New York Stock Exchange if the deal closes near the end of the year as expected. The tracking stock holders can also cash out for $109 per share—with a cap of $9 billion paid to those who decide to sell.

Dell is paying for the deal in part through an $11 billion special dividend that VMware will pay to shareholders, according to a securities filing. Dell expects to receive about $9 billion from its VMware ownership stake.

Michael Dell has promised VMware and the other companies will continue to operate independently. Even so, shares of VMware fell about 5 percent from their post-deal high, before recovering slightly today to trade at $156.85 as of 1:40 p.m. in New York.

Not everyone remains positive about the buyout of the tracking stock. The VMware dividend uses about 87 percent of the company’s last reported cash reserve, according to The Wall Street Journal, which added that VMware’s tendency toward acquisitions may make the lack of cash not ideal.

Meanwhile, Barron’s wrote that the owners of the stock deserve better, but the deal is likely to gain approval. “The tracker’s current $16-a-share discount to the stated deal price reflects doubts among investors and analysts that the Dell class C common to be issued as part of the transaction will be worth what Dell is assuming,” Andrew Bary of Barron’s wrote July 6.

One reason Michael Dell did well in this deal is because of the control he regained, Bloomberg reported. His stake of the company was 15 percent when he took the company private in 2013—now it will be 47 percent to 54 percent fully diluted, according to the news service.

Dell and Silver Lake may have gotten a lot, but not everything, CNBC reported. CNBC’s Alex Sherman contends that Dell wants to own as much of VMware as possible, but that current VMware investors wouldn’t be interested in a combination with Dell—it’s a lower-growth company with a lot of debt, and a merger may make the VMware stock trade at a lower multiple.

But the deal may give more insight into Michael Dell’s thinking about taking Dell public again, if this is the first in a two-step process toward combining with VMware, Sherman reports.

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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