EMC Corp.'s a Good Way To Play VMware

After indicating with brokers across the street for shares in the VMware (VMW) deal, I was thrilled to get 3,500 shares out of the 30,000 or more shares I asked for. The IPO was priced at $29.00 and immediately began trading above 50. Yes, that’s right, $50.00. Keep in mind, this is in a market that is re-pricing risk and taking liquidity off the table. Now less than a month later, the stock has crossed $80 on an intraday basis and closed at $76.65.

You may be hesitant to trade the stock after such a strong run from the IPO (probably wise) since it is nearly 165% above the deal price, but there is another way to be involved without as much risk. Investors may not know that EMC Corp (EMC) is the primary seller and still holds 88% of the stock. So buying EMC is actually taking a position in VMW while getting the regular data storage business along with it. Also, investors have the ability to hedge a position in EMC while there are no options currently trading on VMW.

The numbers look like this. EMC holds 326 million shares of VMW. Right now, there are about 2,098 million shares of EMC outstanding so for each share of EMC, you get approximately 0.155 shares of VMW. With VMW trading at $76.65, this means that $11.88 per share of EMC is attributable to VMW. you are essentially paying $7.62 for the rest of EMC (since EMC is currently at 19.50). I would suggest considering a purchase of EMC here and then turning around and selling Oct 19 calls at $1.10. This yields 32% annualized assuming the stock is called away, and gives you some risk reduction as you get to keep the $1.10 premium if the stock drops below $19.

Volatile times call for creativity in taking positions and limiting risk. I think this is one of those attractive situations.

Full Disclosure: author has long position in VMW and EMC

Comments

[gembree]

VMW options are now available, and given the ludicrous implied volatility on VMW despite EMC being 60% levered to it, why wouldn't you write a call on VMW instead and hedge with EMC (given that you have privilege beyond simple buy-writes)? It's true that the relative valuation gap could continue to expand, but it could also contract, and the premium is a lot better.

2007 Sep 13 10:31 AM

[Jerlad]

Did anyone else freeze in front of your computer the during VMW's initial trading day because the price was so high? How many of you would have bought 3500 shares at $29 from your "brokers across the street" if you could have? Forget these fancy plays on EMC. Just get yourself broker buddies like Steve has for the next heavily hyped IPO !!!

2007 Sep 13 10:19 PM

[acupunk]

Of course there are options trading
on VMW. At least I have been trading them.

2007 Sep 14 10:44 AM