What is worse than owning stock that is down a third in less than six months? Owning a piece of paper tied to that battered equity which trades at a real, but unclear, discount. In October, technology heavyweight EMC Corp announced it was to be acquired by another titan, privately-held Dell, at an overall value of $67bn. EMC’s crown jewel asset was thought to be its 81 per cent stake in software high-flyer, VMware. (The rest of VMware shares float in the public market.) That stake was so large and valuable that Dell could not pay for it outright. Instead, it created a fuzzy “tracking stock” to add to the cash portion of the deal it was offering EMC shareholders.
The entire package — $24.05 in cash and the tracking stock — added up to $33.15 per EMC share on the offer day. That seemed an attractive price as EMC’s shares had not been above $30 since late 2014. However, the highest that EMC shares have risen since the announcement has been just above $28.
That disconnect is due to several factors. First, it can be ascribed to the general slide in VMware, down 33 per cent since the EMC buyout, making any equity component tied to it less valuable. But the novelty and uncertainty about the tracking stock — it has no formal claim on VMware assets and its vagaries require an eight-page explanation on the EMC website — will leave it to trade at a level less than where genuine VMware shares sit.
The easing of stress in the debt markets in recent weeks will be a boon to the $50bn of debt that Dell will soon be selling to fund the deal. Dell also announced on Monday a $3.1bn deal to sell its consulting arm to NTT Data. Cash from other potential asset sales will also soothe worries about any financing challenges.
The implied value of the deal now is $29.72, based on the value of the pure VMware shares that are listed. EMC, however, trades at just $26.48. What is the appropriate discount for a tracking stock? Big enough that shareholders think very differently to management about the value they are getting.
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