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Categories: DELL EMC VMware

The short game – Do investors take a position in #VMware or #EMC in front of next week’s earnings? Once upon a time, EMC (NYSE:EMC) was a real growth company. No, it wasn’t in the horseless carriage era, but it was in the era before Facebook (NASDAQ:FB). EMC was one of the original poster children of the first Internet bubble and was one of the leading companies of the day. At the height of the craziness, the shares traded at almost $100/share before collapsing to a low of $4.57 a mere two years later. And then, the long, slow climb back to current levels interrupted by the financial crisis. And once upon a time, VMware (NYSE:VMW) was also a real growth company. As recently as 2014, VMware still grew 16% and somewhat further back in its history, it had been a hyper-growth company as desktop virtualization swept the IT business The days of EMC being a growth company are long since passed, the days of Dell being a growth company are also long behind it, but none of that actually matters to those investors interested in buying what will be called the Class V tracking stock because it will essentially track the value of VMware’s shares and nothing else. Overall, the new arrangement will give EMC’s shareholders a 53% economic interest in VMware compared to the 81% interest they currently hold. Simply put, if you are a current EMC shareholder and continue to hold your shares until the time of the merger, you will get $24.05 in cash and .111 shares of the new Class V stock that is tied to the value of VMware. At the moment, with VMware shares selling at $59, EMC shareholders will get a tracking stock that is notionally worth over $6.50/share, so they will get about $30.50 in value for shares that are currently selling for $27.51. Since it appears that there is little risk at this point that the merger between #Dell and EMC will not be consummated; that seems a pretty good return for a straightforward arbitrage. The tracking shares will inevitably sell at some modest discount to “real” VMW shares, I imagine, but it is still an attractive arbitrage, I believe. But the purpose of this article, now that I have described the essence of the transaction for current and potential EMC shareholders, relates for the outlook for VMW, as it is likely to be looking forward from the time the merger is consummated.

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