Over 20% Upside For EMC
Chris DeMuth Jr. • 43 Comments
Chris DeMuth Jr. • 43 Comments
EMC: As Growth Begins To Accelerate, Shares Remain Undervalued
Helix Investment Research • 12 Comments
Helix Investment Research • 12 Comments
Oct. 20, 2015, 5:44 PM
- In tandem with VMware's (NYSE:VMW) Q3 report, VMware and parent EMC (set to be acquired by Dell) announce they're forming a cloud services JV (each company owns 50%) under the brand of enterprise cloud infrastructure (IaaS) services and software provider Virtustream (recently acquired by EMC for $1.2B).
- In addition to Virtustream's IaaS services, the business will contain VMware's vCloud Air IaaS platform, VCE's Cloud Managed Services business (provides cloud services running on VCE's converged infrastructure systems), and EMC's managed storage services. The new Virtustream promises to ""will integrate these assets to provide customers with a unified infrastructure-as-a-service offering," and to "integrate and extend existing on-premises EMC Federation private cloud deployments into the public cloud."
- Virtustream CEO Rodney Rogers will run the business, which is expected to produce "hundreds of millions of dollars" in 2016 revenue, and will face stiff competition from the likes of Amazon, Microsoft, and IBM. Meanwhile, VMware will create a cloud software unit servicing vCloud Air and other service providers, and which will contain both existing VMware tools and Virtustream's software.
- The new Virtustream is separate from EMC and VMware's Pivotal JV (created in 2012, IPO plans still on hold), which provides cloud app platform (PaaS) software/services, software development tools, and analytics hardware/software.
- VMware has dropped after hours in spite of posting a Q3 beat. Guidance is the apparent trigger. VMware guided on its earnings call for high-single to low-double digit 2016 revenue growth (consensus is at 10.9%). Q4 EPS guidance is healthy: $1.23-$1.27 vs. a $1.23 consensus.
- VMware's Q3 results, earnings release
- Update (6:31PM ET): VMware's earnings slides (.pdf) are up. In addition to providing 2016 revenue guidance, the company forecasts op. margin will drop to ~28% in 2016 from 2015's 31.8%. Shares are now down 5.8%.
- Update 2: Also of note: Q4 revenue guidance of $1.825B-$1.875B is slightly below a $1.88B consensus. License revenue is expected to rise 3%-7% Y/Y in Q4, after growing 7% in Q3 to $681M.
- Update 3: VMware closed after hours trading down 3.4%.
Oct. 20, 2015, 5:30 PM
Oct. 13, 2015, 3:04 AM
- Dell's $67B buyout of EMC (NYSE:EMC) appears to be a win for nearly everyone involved - except for the data storage company’s bondholders, Bloomberg reports.
- Investors in EMC's $5.5B of bonds are down about $338M since news of the deal first became public last week.
- Why's that? Dell's plan to raise about $50B in debt for the acquisition will push existing bondholders down the capital structure since the notes lack protections that would've allowed for early repayment in the event of an ownership change.
- Previously: EMC trades at big discount to buyout price; VMware defended as shares plunge (Oct. 12 2015)
Oct. 12, 2015, 6:32 PM
- Thanks to VMware's (NYSE:VMW) 8.1% drop in regular trading, the official value of Dell's buyout offer for EMC ($24.05/share in cash + 0.11 shares of a VMware tracking stock) fell from $33.15/share to $32.00/share. However, that's still 13% above EMC's $28.35 closing price.
- Part of the discount likely stems from expectations VMware tracking stock will trade at a discount to its regular shares, given the tracking stock will have no voting rights or access to dividends (should VMware begin paying one). Nonetheless, some M&A arb traders see a compelling opportunity, assuming the tracking stock trades at a moderate discount.
- There's speculation another tech giant could bid for EMC during its go-shop period. But there haven't been any formal reports of buyout interest, and EMC's current price suggests markets are skeptical of a rival bid arriving. HP (NYSE:HPQ) used today's news to trash-talk EMC/Dell - "Two of our largest competitors are attempting a highly distracting, multi-year merger, just as we are launching two new, focused companies." - while Dell server/networking rival Cisco (NASDAQ:CSCO) affirmed its partnership with EMC.
- Meanwhile, several analysts defended VMware as shares tumbled thanks to the EMC/Dell news and VMware's Q3 pre-announcement - revenue and EPS are expected to top estimates, but billings growth of 3% Y/Y fell short of expectations. Cowen's Gregg Moskowitz: "While we believe this deal certainly could have been better structured (i.e. there is no collar on VMW's stock), and the billings were disappointing, the selloff nonetheless looks clearly overdone, as we expect no meaningful impact to VMW's strategy or operations."
- MKM's Kevin Buttigieg: "At the current intraday price of $71, VMW is 13x CY16 consensus EPS excluding net cash of $13/share, a level we think presents tremendous value, though likely requires patience given uncertainty around the Dell deal." On this morning's conference call, departing EMC CEO Joe Tucci suggested Dell is looking to up its VMware stake over time.
Oct. 12, 2015, 9:18 AM
- VMware (NYSE:VMW) has fallen to $73.20 premarket after EMC and Dell confirmed the latter is buying the former for $67B - the deal value is now a bit lower thanks to VMware's selloff - with part of the consideration consisting of a VMware tracking stock that stands to significantly increase the company's publicly-traded share count.
- Also: In tandem with the deal, VMware has pre-announced it expects Q3 revenue of $1.672B (+10% Y/Y, +14% exc. forex) and EPS of $1.02, slightly above a consensus of $1.66B and $0.99. License revenue is expected to be at $681M (+7% Y/Y), in-line with guidance for 6%-7% growth. Total revenue + sequential change in unearned revenue is only expected to be up 3% Y/Y. Full Q3 results are due on Oct. 20.
- Though overshadowed by the Dell deal, EMC has also pre-announced: It expects Q3 revenue of $6.05B-$6.08B and EPS of $0.43, below a consensus of $6.25B and $0.45. The company partly blames "a higher than expected build in unshipped storage product orders of approximately $100 million due to the timing of bookings." Smaller peer Quantum recently reported something similar.
Oct. 12, 2015, 7:41 AM
- EMC owners will receive $24.05 per share in cash, along with a tracking stock in VMware (NYSE:VMW) linked to a portion of EMC's ownership in the company. Based on current numbers, EMC shareholders will receive about 0.111 shares of the new tracking stock for each share of EMC they own. Based on the recent price for VMW, it implies total consideration of $33.15 for each share of EMC - a deal value of about $67B. There are no financing conditions on the closing.
- The purchase is expected to close sometime between May and October next year.
- EMC and VMware are holding a joint CC starting in a few minutes, and Dell and EMC will host a call at 8:45 ET.
- EMC +4.8% to $29.20 premarket.
- Previously: EMC confirms Dell deal; call coming in 25 minutes (Oct. 12)
Oct. 12, 2015, 7:21 AM
- The terms aren't disclosed, but reports have put the deal price at about $33 per share vs. EMC's close on Friday at $27.87. Roughly $25 of that would be paid in cash, and the rest with a tracking stock for VMmare (NYSE:VMW).
- There will also reportedly be a 60-day go-shop period.
- A webcast is set for 7:45 ET.
- The company also preannounces its Q3, with revenue expected at $6.05B-$6.08B, and non-GAAP EPS of $0.43.
- EMC is higher by 4.8% premarket to $29.20.
- Previously: Dell-EMC deal expected Monday morning (Oct. 12)
- Previously: EMC +4.1%; Dell reportedly offering $33/share (Oct. 9)
Oct. 12, 2015, 2:52 AM
- According to multiple sources, Dell is set to announce the biggest pure tech deal in history at 7 a.m. on Monday, after the privately run PC maker agreed to acquire data storage firm EMC (NYSE:EMC) for more than $53B.
- However, as part of the deal, EMC will have up to 60 days to solicit bids from other potential suitors, Reuters reports.
- The "go-shop" provision, is a preventive move to avoid a public confrontation with Elliott Management, the activist investor that has a significant stake in the company.
- What will happen to EMC's 80% stake in VMWare (NYSE:VMW)? We will soon see.
Oct. 9, 2015, 5:41 PM
Oct. 9, 2015, 4:41 PM
- The M&A reports keep pouring in. Bloomberg reports Dell is offering about $33/share to buy EMC, after factoring both cash and a VMware (NYSE:VMW) tracking stock whose value to EMC shareholders would be equal to ~$8/share.
- EMC has risen to $29.00 after hours. CNBC reported earlier today Dell's offer for EMC would be worth at least $30/share. Re/code reported the cash component of Dell's offer is worth $27.25/share.
Oct. 9, 2015, 1:52 PM
- A day after reporting Dell is bidding more than $27/share for EMC (EMC +1.5%), CNBC's David Faber reports Dell's bid is believed to be worth at least $30/share, and is expected early next week.
- Faber adds the deal will feature both cash and a VMware (VMW +0.6%) tracking stock, and that Dell is still lining up financing. He reiterates Dell would maintain control of VMware.
- EMC and VMware are both trading higher; the former is still below $28. VMware fell hard yesterday amid reports Dell could sell/spin off part of EMC's 80% VMware stake to make a deal more digestible.
- Prior EMC/Dell coverage
- Earlier: Dell reportedly confidentially files for IPO of security services unit
- Update: Re/code reports Dell is offering $27.25/share in cash for EMC to go with a VMware tracking stock.
Oct. 8, 2015, 4:43 PM
- While EMC finished up 4.7% following reports the company is in merger/LBO talks with Dell, VMware (NYSE:VMW) went in the opposite direction. Driving the selloff: Speculation Dell will sell or spin off part of EMC's 80% VMware stake to make a deal easier to digest.
- Though reporting Dell wants to maintain control of VMware (growing much faster than core EMC, and also much faster than Dell was before it was taken private), CNBC's David Faber states there might also be "a distribution of some of [EMC's] VMware stake to shareholders."
- Likewise, Bloomberg reports Dell "may sell off some of EMC’s VMware shares in order to raise money," while keeping VMware publicly-traded. It adds Dell is talking with JPMorgan, BofA, and other banks about raising at least $40B in financing, and that "the current plan" is for Michael Dell to run the combined company.
- Macquarie's Rajesh Ghai: "Such a deal structure would be agreeable to Elliott, considering it is in essence a version of its earlier demand that EMC spin off (VMware) to unlock value in its undervalued (ex-VMware) stub. We believe such a structure would involve EMC issuing shares to Dell's shareholders for the initial merger with Dell, and then executing a tax-free spinoff of (VMware) as a second step."
- As VMware slumped, EMC/Dell storage rival NetApp (NASDAQ:NTAP) rose 2.4%, aided by M&A hopes and perhaps also a belief NetApp could take share as EMC and Dell work to integrate their storage lines and remove duplicate products. Longbow's Joe Wittine: "We think the [EMC/Dell] rumor is encouraging for NTAP, which would see a similarly-underperforming competitor in Dell EqualLogic lose importance and likely donate share. While NetApp would still have its product issues, it becomes easier to make a case as NetApp as takeout fodder from Cisco or others."
- Also rallying: HP, which is about to split its enterprise IT ops from its PC/printing ops
Oct. 8, 2015, 9:09 AM
- CNBC's David Faber reports a Dell bid for the whole of EMC would be above $27/share. For reference, EMC closed yesterday at $25.96.
- Faber adds a deal could be a week away, and would require $40B in financing. Dell would keep control of VMware (VMW - 80%-owned by EMC).
- EMC +5.2% premarket to $27.30. The company's market cap stands at $52.6B. VMW +0.5% to $82.52.
- The WSJ reported of Dell/EMC merger talks yesterday evening.
- Update (9:22PM ET): VMware is now down 1.4%.
- Update (1:06PM ET): Bloomberg also reports of deal talks, while adding several major banks have been approached regarding financing. EMC would be taken private, while VMware would remain publicly-traded. EMC is up 5%, and VMware down 6.2%.
Oct. 7, 2015, 7:00 PM
- The WSJ reports Dell (taken private in 2013) is in talks to merge with EMC, while adding it's not clear if a deal would be for all or part of EMC.
- Dell was taken private for $24.9B. EMC closed today with a $50B market cap. IDC estimates Dell had 14.5% of the PC market in Q2, and 17.5% of the server market (entirely x86 server sales). The company also sells storage hardware (competes to an extent with EMC, among others), networking equipment, peripherals, printers, and software.
- Last year, EMC was rumored to have held buyout talks with HP. There has been speculation the company could strike a major deal prior to CEO Joe Tucci's expected retirement, particularly with activist Elliott Management (has been pushing for a VMware spinoff) maintaining a stake.
- A Dell acquisition would present major integration challenges, but would also allow EMC to sell enterprises an end-to-end IT hardware product line (or close to it) as it competes with the likes of HP, IBM, Cisco, and Oracle, and also yield cost synergies. Like peers, both Dell and EMC have been pressured by enterprise adoption of public cloud services running on commodity hardware built by contract manufacturers.
- EMC is up 4.4% after hours on the report. Subsidiary VMware (NYSE:VMW) is up 0.5%.
- Update (7:16PM ET): The full story is up. EMC is now up 7.8% after hours.
Oct. 1, 2015, 3:04 PM
- Though its standstill agreement with EMC (EMC) expired today, activist Elliott Management is giving the storage giant most of October to respond to its demands, Reuters reports.
- Elliott, which obtained two board seats earlier this year as part of a standstill deal, has long been pushing for EMC to spin off its 80% VMware (VMW +2.5%) stake. It's also in favor of larger buybacks.
- EMC storage division chief David Goulden recently reiterated the company line that EMC and VMware are better off together. Re/code reported in August EMC's board has mulled a VMware acquisition of EMC (i.e. a downstream merger).
- VMware has gradually rallied today. Its shares have previously sold off on reports raising the possibility of a downstream merger or EMC stake spinoff.
Sep. 1, 2015, 2:59 PM
- As usual, VMware's (VMW +0.5%) annual VMworld conference has been filled to the brim with product and partnership announcements. Among the most prominent: A deal with rival Microsoft (NASDAQ:MSFT) to create a new product (called Project A2) for managing and upgrading Windows 10 PCs.
- A2 leverages VMware's AirWatch enterprise mobility suite, and its App Volume app management software. VMware: "We believe that we are pioneering a unique approach in the industry with a combination of heterogeneous management and real-time application delivery that makes applications lightweight, easy to deliver and simple to consume for users using any device."
- Meanwhile, Nvidia (NVDA -3.8%) has announced Grid 2.0, a new version of its server-based GPU platform for powering virtual PCs/workstations. Grid 2.0 works with VMware's Horizon virtual desktop software, and supports up to 128 users per server (up from 64 previously).
- VMware's core vSphere virtualization platform has been updated to support integrated app containers (often seen as a threat to standard server virtualization) from Docker and other container platforms. Underpinning the solution is Photon, a platform for deploying and managing containers running on top of vSphere.
- Also announced: 1) EVO SDDC, a product for managing/deploying data center resources; VMware promises many traditional deployment tasks can be automated. 2) VSAN 6.1, a new version of VMware's storage virtualization platform that supports new data protection features. 3) Disaster recovery, database, and object storage services for the vCloud Air hybrid cloud platform.
- Baird's Jayson Noland has upgraded VMware to Outperform after attending the company's analyst day (held at VMworld). He calls VMware "the best positioned software infrastructure provider," notes management was positive about enterprise license agreement (ELA) demand, and "continues to see potential for increased alignment with EMC and potentially a spin-in designed to drive improved cost and revenue synergy."
- VMware is up slightly on a day the Nasdaq is down 2.3%.
- Yesterday: VMware rises after downplaying EMC downstream merger rumor
- Last year's VMworld announcements: I, II
- Analyst day slides
EMC Corp. is an information technology company, which develops, delivers and supports a range of information infrastructure and virtual infrastructure technologies, solutions and services. It enables businesses and service providers to transform their operations and deliver information... More
Industry: Data Storage Devices
Country: United States
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