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Potential Dell VMware Reverse Merger: Investor Letter Expresses Concerns

Dell Technologies CEO Michael Dell

As Dell and VMware consider a potential reverse merger, a major investor has sent a letter to VMware’s independent directors, expressing serious concerns about the discussions.

Jericho Capital Asset Management, which owns approximately 1.8 percent of VMware’s stock, sent a letter that stated:

“There is no doubt in our mind that a reverse merger of Dell into VMW would be a terrible deal for VMW shareholders. Even the most casual observer can see that VMW gains nothing by saddling the Company’s faster growth, net cash, highly strategic software business with the dead weight of Dell’s slower growth, heavily debt-laden, legacy hardware-dependent entity. Any such transaction would significantly damage VMW. But assuming the Company is of the view that a strategic acquisition is necessary, we believe there are any number of other compelling opportunities for VMW to pursue that are far more accretive and value-enhancing for all shareholders, as opposed to a transaction that would burden the Company with a massive debt load and benefit solely its majority shareholder.”

A reverse merger raises three concerns, Jericho alleges in the letter:

  1. It would derail the ongoing resurgence of VMware’s prospects just as its strategy increasingly resonates with investors.
  2. It would create a public company that would not appeal to a growth-oriented investor base, and would likely trade at a steep discount to VMW on a standalone basis.
  3. It would only serve the interests of Dell at the expense of VMware’s minority shareholders, as VMW’s cash and cash flows would go towards servicing Dell’s debt instead of towards share buybacks or strategic acquisitions that would create value for all VMW shareholders.

Dell declined to comment about the letter, citing a quiet period as the company contemplates a range of potential business strategies.

Dell-VMware Reverse Merger Discussions: Reality Check

No doubt, concerns about the potential Dell-VMware reverse merger are weighing down VMware’s stock. As Jericho notes: During January 29 and January 30, 2018 when the first reverse merger discussion reports emerged, VMW’s stock dropped 21 percent. Then, VMW shares fell 12 percent over March 1 and March 2, 2018 when a second round of press articles about a potential deal surfaced.

Jericho Capital isn’t alone in its concern. Earlier this month, GBH Insights said a reverse merger would “create an albatross” for VMware shareholders.

No doubt, Dell still leans heavily on hardware sales while VMware has growing momentum with software-defined networking and storage. That said, Dell’s most recent quarterly results showed stronger-than-expected revenue growth.

Dell-VMWare Reverse Merger Discussions: Decision Day?

VMware CEO Pat Gelsinger

Michael Dell and his advisors apparently want to reach a decision on the potential reverse merger within the next several weeks, with multiple sources pointing to Dell EMC World 2018 (April 30 – May 3) as a potential announcement target. Both Michael Dell and VMware CEO Pat Gelsinger are scheduled to keynote the conference.

Multiple reports reinforce that there’s a chance Dell may decide not to pursue the reverse merger.

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2 Comments

Comments

    Larry Walsh:

    The VMware shareholders’ concerns are not unfounded. However, they presume that Dell will remain a slow-growth, privately held company. Chances are that Dell will return to the public market within the next 24 months, and having VMware under its umbrella will only enhance its value. With that forward perspective, VMware should extract a higher price today.

      Joe Panettieri:

      Generally speaking I think VMware is better off as an independent company, especially since software-defined networking & storage businesses are heating up.

      Still, Dell deserves the right to present its case publicly on the potential deal benefits… if such a deal actually moves beyond boardroom discussions.
      -jp

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