Are Big Q3 Earnings at VMware, Dell a Mixed Blessing for Merger?

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Enterprise software maker VMware Inc. (NYSE: VMW) reported third-quarter results after markets closed Thursday that included a 14% year-over-year jump in sales to $2.2 billion. Computer maker and majority owner of VMware, Dell Technologies Inc. (NYSE: DVMT), also reported a solid 15% year-over-year revenue increase to $22.48 billion.

Dell Technologies is a tracking stock issued in 2017 when Dell Inc. completed its $60 billion acquisition of VMware. The stock tracks a portion of Dell’s investment in VMware and will serve as Dell’s re-entry mechanism to the public markets when a planned reverse merger occurs, currently expected before the end of this year.

The surprise results were attributed to Microsoft’s decision to end support for its Windows 7 operating system beginning in 2020. That caused a burst of hardware buying that certainly helped boost Dell Technologies’ numbers. Software upgrades and licensing revenues pushed VMware’s sales higher

The better-than-expected results may reignite a battle that was once settled over Dell’s plan to buy out its Class V common stock shareholders for cash and Class C common stock. Two weeks ago Dell raised its exchange offer from $109 a share to $120 a share in cash or between 1.5 and 1.8 shares of Class C stock for each Class V share. According to Dell, the total offer is valued at $14 billion. A shareholder vote to approve the exchange offer is currently scheduled for December 11.

The problem for Dell may be the result of the third quarter’s better-than-expected results. VMware shares were indicated up about 8% in after-hours trading following last night’s earnings release. That means that investors in the tracking stock could be leaving serious money on the table by taking Dell’s $120 offer.

VMware shares closed yesterday at $161.48 and traded up more than 6% in Friday’s premarket. Dell Technologies stock closed at $106.00 and traded up nearly 2% in the premarket session this morning.

Dell has commitments from Dodge & Cox, Elliott Management, Canyon Partners and Mason Capital Management, who collectively own approximately 17% of Dell Technologies’ total outstanding Class V common stock. Carl Icahn, who owns about 9.3% of Dell Technologies, said he would not oppose the $120 per share offer, but he was not listed as one of the investors who had committed to accepting the sweetened deal. Icahn withdrew his lawsuit opposing the deal and terminated his proxy battle.

Even so, another $10 or so per VMware share is real money and may move Icahn or some or all of the other investors to rethink their acquiescence to the $120 offer. Activist investor P. Schoenfeld Asset Management has already suggested that Dell should pay $130 per share for the tracker.

If the investors that have committed to the $120 deal remain firm in their commitments, neither Icahn nor Schoenfeld or the two combined can derail the exchange. The opera may not have reached its final aria yet though. Stay tuned.

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