VMware: Speculation of No Dell Deal Is a Good Deal for the Stock
@Dell is the majority owner of @VMware, and the prospect that Dell might buy VMware, rumored for more than a month, has been weighing on VMware shares. –– –– The tracking stock for Dell’s stake, @DellTechnologies (DVMT), is just about flat, at $72.85. Credit Suisse’s Brad Zelnick reiterated an Outperform rating on shares of VMware this morning, writing that the report suggests Dell “is less likely to pursue a reverse-merger with VMware,” which to him is an “incremental positive” for VMware stock. He notes that Dell having the majority stake is still an “overhang” on VMware — probably, he figures, VMware stock is trading at a 30% discount to the company’s intrinsic value. Zelnick reminds investors why a purchase of VMware by Dell would be bad: There would be conflicts with VMware’s partners such as Hewlett Packard Enterprise (HPE), and Dell has a lot of debt on its balance sheet: We acknowledge that Dell’s GTM and Sales relationships have benefitted VMW (~$400mn bookings synergies in FY18, with $700mn in FY19E), with the company seeing re-acceleration to double digit top-line growth. However, we emphasize that a potential reverse merger could create significant channel conflict with important partners (i.e. HPE), while also de-rating the multiple on VMW public equity. Also, channel partners like HPE may very well gravitate to competitors i.e. Nutanix, Red Hat in the eventuality of a reverse merger. Dell’s total debt stands at $53bn, with core debt at $40bn. For FY18A, VMware represented 10% of Dell revenues , but 53% of FCF.