Ah, nothing goes easy with that $67 billion Dell-EMC deal, does it? Today the plot thickened a bit more when VMware announced in a filing with the SEC that it was walking away from the agreement with EMC to form Virtustream as a jointly owned company. Re/code first reported this news.
This whole deal has from the start been a fairly complex tale, and like the movie Groundhog Day, one we seem to be telling over and over each time a new bit of news comes our way. It takes some background, so strap in while I explain the complications on top of the complications in this merger. If you haven’t been following along at home, you may want to take notes.
For starters, EMC owns 80 percent of VMware, but the company operates as a separate entity with its own board of directors and separately traded stock. A couple of weeks after the Dell-EMC merger announcement, EMC and VMware decided to throw a little wrinkle into the deal, announcing they were forming a separate jointly-owned company called Virtustream from the company EMC had purchased in May for $1.2 billion. The companies announced further that in spite of the 50/50 split, the Virtustream’s financial results would be included on VMware’s books.
You with me so far?
VMware shareholders never seemed to be terribly fond of the Dell-EMC deal, and they were even less so with this announcement. How much did they hate it? Well, the price of VMware’s stock has been dropping precipitously since October 7th, which represented its three month high.  The Dell-EMC deal was announced on October 12th and the slide continued.
To give you a sense of the drop, the stock price was $82.09 on October 7th. After that the price began dropping steadily, and on October 20th, the day of the Virtustream announcement, the price hit its 3 month low at $55.42. It continued to sputter along improving only slightly over the next couple of months, and as we went to press, the price was $57.05, down $2.03. Apparently even announcing it was abandoning the Virtustream idea was not enough to placate restless investors.
Part of the problem is the way the Dell-EMC has been structured, using a concept called tracking stocks. Under the terms of the merger agreement, Dell will pay EMC shareholders $24.05 per share, but it will pay the remainder of $9.10 per share in stock that tracks against the price of VMware’s stock. As the price of VMware drops, that provision continues to decline in value.
That could be a big reason that VMware decided to cut its losses and try to restore shareholder confidence by walking away from the Virtustream part of the deal. If it doesn’t own 50 percent of the deal, it doesn’t have to deal with the company’s projected first-year short-fall.
“The Virtustream deal needed substantial funding to get it off the ground and its chances of turning a quick profit were pretty slim. Hence its really not a surprise this is being canned [by VMware],” Alan Pelz-Sharpe, an analyst with Digital Clarity Group told TechCrunch.
If this story isn’t complicated enough, there is the whole rigmarole about this tracking stock component possibly being a taxable event that could cost Dell $9 billion — and actually put the deal into question. All of this uncertainty is giving the accountants, investment bankers and lawyers plenty to talk about and likely oodles of billable hours too, which should make them very happy.
EMC put a happy face on the change. “EMC is 100% committed to Virtustream, which represents our fastest-growing Federation entity and continues as the focal point of EMC’s mission-critical, enterprise-class cloud strategy. Virtustream will stay tightly aligned to VMware through the Federation partner model,” the company told TechCrunch in a statement.
For now, this deal keeps rolling along, but the complications continue unabated. Over the weekend, EMC reported that its ‘Go Shop’ provision expired. This was the provision that enabled EMC to keep shopping for a better price than the $67 billion it got from Dell.
If all goes as planned, the merger will be completed some time in the second or third quarter next year. Did you get all that?  I hope so. There will be a quiz later.
