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Stock Analyst Update

What Dell's Move Means for VMWare

We may lower our fair value estimate on VMWare once the $11 billion dividend is paid to reflect the major hit to its cash balance.

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Dell Technologies announced on July 2 a concrete plan to bring the company public and simplify its structure. The plan entails eliminating Dell’s Class V tracking stock (herein described by the stock's ticker, DVMT) with the help of its controlling stake in  VMware (VMW), of which Dell owns 81%. VMware will remain an independent, publicly traded company, but the firm will issue an $11 billion special dividend to shareholders, thus paying out 81% of such dividend, or $9 billion, to Dell so it can complete the DVMT transaction. We will maintain our $107 fair value estimate for the time being. We may lower our fair value estimate once the $11 billion dividend is paid to reflect the major hit to VMware’s cash balance as the funds are essentially transferred out of VMWare and into Dell. VMWare's stock price rose 10% on the news, perhaps due to optimism that Dell's next move may be to buy out the remainder of VMWare, as well as the risk that VMWare would have acquired all of debt-laden Dell. We note that in a CNBC interview, Dell Technologies CEO Michael Dell has made it clear that it is not currently intending to buy out VMware’s remaining 19% stake, although the DVMT deal makes it easier to do so. Dell noted the need for its subsidiaries, like VMWare, to have public stock for talent acquisition and retention purposes. Our fair value estimate for VMWare does not consider an acquisition premium.

We also note that VMWare reiterated its financial guidance for its second fiscal quarter, while updating its fiscal 2019 earnings per share guidance. The firm now expects GAAP EPS for fiscal 2019 in the range of $5.43-$5.73 as well as non-GAAP EPS of approximately $5.99 per share.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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