2010 is shaping up to be the year of the dividend. Stock buybacks are now becoming to be “Oh so 2007” for investors. In fact, many argue whether or not stock buyback plans do anything at all except waste cash. And last night came the announcement from VMware, Inc. (NYSE: VMW) that it was repurchasing up to $400 million in common stock through 2011. This will potentially have a tie to the EMC Corp. (NYSE: EMC) relationship and spin-off, but it is also reminiscent of the Cisco Systems Inc. (NASDAQ: CSCO) and Dell Inc. (NASDAQ: DELL) stock buybacks. And we cannot leave Intel Corp. (NASDAQ: INTC) out of this one either.
VMware’s board of directors authorized the purchase of up to $400 million of its Class A common stock through the end of 2011 in transactions from time to time. These purchases can be in the open market or through private transactions subject to market conditions.
Usually buybacks are meant to take off excessive shares or to reduce the public float of a common stock. Effectively, this drives up earnings per share from operations. But many tech companies have to repurchase shares of common stock in the open market to absorb the shareholder dilution that comes from all those employee stock options as they get exercised. This is what Cisco Systems and Dell have been known for. Like it or not, they effectively had to conduct share buybacks to keep employee stock options from constantly adding to the float.
But based upon a recent deal announced where VMware acquired certain EMC operations, all of this seemed to be a prelude to great break-up of the EMC ownership of VMware. VMware is its own public entity, but EMC owns a super-majority stake in the company. And also yesterday came a release from EMC Corp. (NYSE: EMC) that it would purchase shares of VMware in a stock purchase program “to allow the company to make open market purchases of VMware Class A common stock in order to maintain EMC’s approximately 80% majority ownership at its current level over the long term” and “… underscores VMware’s role in EMC’s strategic direction.” More importantly said was, “We believe maintaining EMC’s ownership level in VMware at approximately 80% allows us to continue to achieve the above objectives while also maximizing value for EMC shareholders over the long term.”
Intel Corp. (NASDAQ: INTC) and Cisco Systems (NASDAQ: CSCO) also own very small stakes in VMware.
As far as explaining this notion, VMware’s press release noted, “The Company expects the equity purchase program to help partially offset dilution from its equity programs and believes it to be an appropriate use of proceeds from the exercise of employee stock options.” So the vesting and expected exercise of options is the reason. Thankfully, this is not just a company with a triple-digit P/E out buying shares because it has extra cash and wants to make a statement.
Everything here has seemed like a prelude to EMC monetizing its virtualization leadership in VMware. But this new effort with ‘long-term’ being noted is meant to dispel the notion that EMC is about to monetize that VMware 80% stake. VMware has a $20+ billion market cap, meaning that the value to EMC is roughly $16 billion. EMC’s market cap is $36 billion today, yet it has over $8 billion in cash and investments.
As EMC talks about achieving objectives and maximizing value over the long term, there is no promise that EMC won’t eventually monetize this VMware stake. It just seems that now that is no longer a “sooner rather than later” proposition. That is surprising, at least to me.
JON C. OGG
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