Dell could spend at least $3 billion in buying back VMware tracking stock in the latest piece of financial engineering surrounding the proposed purchase of EMC.
EMC owns 80 per cent of VMware and the idea was that a tracking stock should be established for VMware. In this way, if and when Dell owns EMC and offers some VMware stock for sale – as it intends to do – EMC stockholders would have a way of receiving payment/value for EMC's holding in VMware.
EMC shareholders would receive 0.111 of a VMware tracking share for each EMC share they owned. As VMware and its share value is growing faster than EMC, this would be a way of providing value to them without actually paying them cash or giving them VMware shares directly.
Since the acquisition was announced, VMware's stock has fallen by about 30 per cent as investors reacted to this and to the news that EMC and VMware were setting up a 50:50 joint venture for Virtustream Cloud Services. This exposed VMware to potential losses, which investors did not like, and VMware has now withdrawn from that JV.
Reuters reports the VMware tracking stock disclosure was made by privately owned Dell in an SEC filing, and it said it could spend more than $3bn if its net income rose high enough. Generally, stock buy-backs are a measure to buy a company's own shares so that there are fewer of the them owned by investors, thereby uplifting an earnings-per-share (EPS) measure. EPS is a company's profit divided by the number of outstanding shares in its common stock.
The "outstanding shares" term refers to company stock held by all its shareholders. EPS measures are used by investors to rate the attractiveness of a company's stock and the higher it is, the higher the stock price will tend to be.
Dell has said its priority in the 18 to 24 months after the EMC acquisition completes will be to reduce the $49.5bn debt burden taken on board in buying EMC. That implies VMware-tracking stockholders will not see that much buy-back activity in that period. ®