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Categories: DELL Dell Technologies EMC VMware

@Dell is eyeing growing earnings and cash flows after recent tax reforms. @VMware’s got upside even if its hard for the market to see. #DVMT by default has upside if VMware has upside plus additional spread upside. VMware Inc. ( #VMW) and @DellTechnologies Inc. (DVMT) have taken a decent beating from overly pessimistic M&A concerns as privately held Dell looks to make a move to shore up its earnings and cash flows after last year’s tax reforms. Dell has many options it can entertain, including a reverse merger option with VMware taking Dell public again, along with a host of other possibilities involving VMware, its tracking stock DVMT, along with potential spinoffs of other parts of its businesses, or even the creation of yet another tracking stock etc. After Dell’s EMC deal, which seemed anything but lucrative for EMC owners at the time, and the complexities of the upcoming potential deal, I think much of the market is taking a pass at this time on great potential upside for both VMware as well as DVMT whether a deal is announced or Dell chooses to wait until the end of the year to act. According to Dell’s most recent earnings report, it was carrying a hefty nearly $50 billion dollar core debt load after it closed the EMC deal last year that has come down since then to just under $40 billion excluding Dell’s Financial Service’s debt, which Dell does not include in its core debt numbers. This debt has become more of a concern for the company after the federal Tax Cuts and Jobs Act of 2017 was passed by Congress late last year. This bill limits the tax deductibility of interest payments to 30 percent of a company’s earnings before interest, taxes, depreciation and amortization ((EBITDA)). So, this means Dell gets to deduct less of its massive interest expenses going forward that it would have before the Jobs Act, and needs to consider possible options to grow its earnings and cash flows, or delever its balance sheet, if it wants to maintain its investment grade credit rating while continuing to pursue further deals. Thus, Dell is looking at merger options involving VMware’s tremendous growth and cash flows early on in 2018 instead of waiting to merge or explore other VMware options at the end of the year. VMware is a leader in cloud infrastructure and business mobility and its recent earnings report show why it continues to dominate what it does in the cloud space. VMware’s Y/Y revenues grew at a healthy 14% clip, and its key licensing revenue grew over 20%. This tremendous growth in one of the hottest technology spaces out there along with its $11+ billion in cash and over $6 billion in unearned revenue make it a very tempting target for Dell to fully integrate into its business as it already owns almost 82% of VMware from the EMC deal. Here is how VMware’s stock traded around the EMC deal that closed last September of 2016, as heavy pessimism surrounded the stock in the months prior to the deal. Also note the quick recovery the stock made around and after the EMC deal closed when the uncertainty went away. Notice also, the recent drop in the stock price due to the news that Dell was again on the M&A hunt earlier this year.

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