Why Wedbush Sees Over 40% Upside at VMware After Acquisitions

VMware Inc. (NYSE: VMW) is on an acquisition spree. Thursday night the firm announced that it would be acquiring both Carbon Black Inc. (NASDAQ: CBLK) and Pivotal Software Inc. (NYSE: PVTL). While this is expected to grow VMware, it definitely will make it difficult for analysts to make heads or tails of the company until all three are integrated.

The company plans to finance these acquisitions with both cash on the balance sheet and its access to short-term borrowing.

The goal of acquiring both Pivotal Software and Carbon Black is to beef up VMware’s portfolio, accelerate its software as a service (SaaS) revenue and leverage the VMW/Dell ecosystem to penetrate further the enterprise SaaS/hybrid cloud subscription opportunity.

Together these acquisitions will cost VMware about $2.8 billion in net cash. For Pivotal, VMware will pay $15 per share to public shareholders and will swap the Pivotal Class B shares held by Dell for VMware Class B shares at a ratio of 0.055, which will give Dell an additional 7.2 million shares of VMware and increase its stake to 81.09%; ultimately valuing Pivotal at $2.7 billion. For Carbon Black, VMware has agreed to offer $26 per share in cash representing an enterprise value of $2.1 billion, which equates to a net payout for VMware of $1.9 billion.

Following the announcement, Wedbush Securities gave its thoughts on where VMware stands to go from here. The boutique brokerage firm issued an Outperform rating with a $210 price target, implying an upside of about 42% from the most recent closing price of $148.15. In the report, Wedbush said:

Strategically speaking, the Pivotal acquisition clearly opens up a key cloud developer opportunity for VMware which is a good fit and cross-sell area, while execution issues should be able to be smoothed out over the next few quarters this ultimately ends Pivotal’s dark chapter as a public company. For Carbon Black, this acquisition significantly bulks up VMware’s overall security portfolio and value proposition to its customers at a critical time for cloud security with it starting to inflect in the field. Financially speaking, both acquisitions should be accretive in the first year to operating income and ultimately boost VMware’s SaaS and hybrid cloud subscriptions by over $3 billion.

Shares of VMware traded down over 8% on Friday, at $135.43 in a 52-week range of $129.33 to $206.80. The consensus price target is $188.19.

Carbon Black shares were up about 6% to $26.00. The 52-week range is $11.80 to $26.11.

Pivotal Software traded up about 8.5% to $14.87 a share. The 52-week range is $8.03 to $29.15.