EMC VMware Buyout Rumors Return With a Twist
Late last year, EMC (EMC) was the centerpiece of much M&A chatter, from activist investor Elliott Management pushing the company hard to sell off its 80 percent VMware (VMW) stake to multiple reports that it held merger talks with IT heavyweights HP (HPQ) and Cisco (CSCO).
Take cover, the buyout buzz is back, only this time it’s got a twist.
According to a Re/code report, EMC is considering a deal in which VMware, the virtualization kingpin in which own an 80 percent majority stake, would acquire the storage giant. The proposed deal, referred to as a downstream merger, would call for VMware to issue new shares to buyout EMC’s 80 percent stake and offer EMC shareholders a cash payout financed via debt.
One reason a downstream merger is said to make financial sense is that VMware’s shares currently trade at a higher valuation relative to earnings than EMC’s shares, Re/code reported.
Right now, no one’s saying who would lead the new company, how its operation would be structured let alone what VMware’s top brass thinks of the whole thing.
A VMware buyout is but one option EMC’s board is mulling as part of a broad strategic review of the company’s operations, Re/code reported, with renewed pressure from activist investor Elliott Management and EMC chief executive Joe Tucci’s retirement at some point serving as backdrops to any and all possibilities.
The hedge fund, which owns about a 2 percent stake in EMC valued at about $1 billion, had been nipping at EMC ankles to divest its stake in VMware to increase its share value. A standstill agreement between the two has kept Elliott at bay for a while but that deal expires in September.
According to Re/code, Elliott lately has made it known it would oppose a deal in which EMC were to acquire the remaining 20 percent of VMware but would back an agreement under which VMware buys out EMC. With two Elliott-installed directors on EMC’s board, the hedge fund is certain to have a significant say-so on any proposed deal.
At this point, it’s not clear which direction EMC’s board is favoring, and specifics of the downstream merger, including prices and premiums, haven’t surfaced, the report said. The deal is said to still be in the talking phase with no agreement reached and no certainty that one will come to pass.
Sources talking to Re/code sketched out the deal EMC’s board is kicking around that would start with VMware issuing about $50 billion to $55 billion in new shares, about 60 percent of which would be directed to liquidate EMC’s 80 percent stake in VMware. EMC shareholders would get the remaining new shares and cash from $10 billion in newly issued debt.
VMware’s shares fell 5 percent, or nearly $2 billion in market cap on the news. As of Wednesday’s market close, VMware was valued at about $36.5 billion.
Tucci has yet to name a successor but the smart money has landed on David Goulden, who heads EMC’s information infrastructure business and VMware boss Patrick Gelsinger.