- The key uncertainy of EMC valuation comes from VMware stock price in future and the discount rate between tracking stock and VMware common shares
- Because of high breaking up fee, and assets/resources Dell Inc and MD himself could leverage, Dell Inc is very likely to close this deal
- your cost of capital and tax rate also determine how attractive this opporunity to you
The formula I use to evaluate EMC per share value:
PV = (24.05 + dividends + VMware stock price*0.111*discount)/(1+ monthly cost of capital)^N month
Depending on when the deal will close, shareholders will receive once or twice dividends per Q.
VMware stock price: its stock price in future after the buyout, e.g. price after 3Q. It is safe to estimate VMware stock price will above $40 after 3Q. Let's say $40-$55.
I really don't have sense what the discount rate between VMW tracking stock and VMW common shares would be, and thus use 50% as the wrost case.
If the deal will happen, the present value of EMC is estimated as the following (use annualized 2% cost of capital and ignored dividends)
if your cost of capital is 8%, the current EMC price may be not that attractive to you.
The above analysis is quite conservative in terms of VMware stock price. Many analysts give a range between $65-75 for VMware common share.
However after the buyout, many pre EMC shareholders hold the VMW tracking stock, the potential dumping may drive down the VMware stock price as well as the discount ratio.
Disclosure: I am/we are long EMC.