Major Shareholder Opposes Rumored Dell-VMware Reverse Merger

A large VMware investor is the latest to say that such a deal would hurt the company and benefit only Dell, VMware's majority shareholder.

VMware

The possibility of Dell Technologies merging with VMware continues to get a cold reception by some in the industry, who see such a deal as particularly damaging to VMware investors and benefiting only Dell.

Despite persistent rumors that have been circulating about such a deal since January, VMware this month reported strong quarterly financial numbers, including a 14 percent jump in revenue—to $2.31 billion—over the same period last year.

However, reports early in March said that Dell CEO Michael Dell and advisers were working on the details of a reverse merger with VMware that could lead to taking Dell public again, though any announcement was at least a month away and may not materialize. Dell is the majority owner of VMware, holding about 82 percent of the stock.

During a conference call to discuss the quarterly numbers, VMware CEO Pat Gelsinger declined to discuss the speculation, which has fueled its share of criticism. An analyst at research firm GBH Insights said Dell would be a drag on VMware and its shareholders, and one of those investors this week agreed. In a letter to VMware’s directors, Josh Resnick, manager member of Jericho Capital Asset Management, said such a reverse merger would destroy VMware shareholder value, adding that “even the most casual observer can see that [VMware] gains nothing by saddling the Company’s faster growth, net cash, highly strategic software business with the dead weight of Dell’s slower growth, heavily debt-laden, legacy hardware-dependent entity. Any such transaction would significantly damage [VMware].”

Resnick also wrote that if VMware officials feel a strategic acquisition is needed, there are “any number of other compelling opportunities for [VMware] to pursue that are far more accretive and value-enhancing for all shareholders, as opposed to a transaction that would burden the Company with a massive debt load and benefit solely its majority shareholder.”

Dell has taken on significant debt over the past several years, through a move in 2013 to buy out shareholders and take the company private and then buying EMC for more than $60 billion in 2016, the largest deal ever in the tech industry and one that brought VMware into the fold. EMC had been the majority investor in the company. Due mostly to those two deals, Dell now holds about $48 billion in debt.

Dell competes in a broad array of markets, including the relatively stagnant PC space and a data center industry that is changing rapidly due to such emerging forces as cloud computing, software-defined infrastructure and the internet of things (IoT). VMware is a significant player in a number of those emerging areas.

Reports began circulating in early January that Michael Dell and other officials were considering options that included the reverse merger with VMware, and later in the month confirmed those rumors in a VMware filing with the Securities and Exchange Commission (SEC). In that filing, company officials said Dell Technologies was looking at several possibilities, including going public or combining with VMware. They also were considering making no changes.

In a brief statement Feb. 2, Gelsinger said that VMware was “not in a position to speculate on the outcome of Dell’s evaluation of potential business opportunities. Dell has been a tremendous partner since it became our majority owner and as we’ve accelerated our growth.”

Speculation ramped up early in March when CNBC, citing anonymous sources, said Michael Dell was reviewing details of a reverse merger with VMware as a way of getting back into the public market. Such a deal could possibility include an equity exchange, according to the report.

Jericho owns about 1.8 percent of VMware’s stock. In his letter to VMware’s board, Resnick cited eight analyst firms that have talked about the negative impact of such a deal on VMware. Among those firms were Morgan Stanley, Deutsche Bank, Oppenheimer, Bernstein and GBH, which said that “the potential Dell reverse merger being discussed would be a major gut punch and value destructor to the VMware growth story."

Resnick also noted other companies that would make better acquisition targets, including Red Hat, Palo Alto Networks and Splunk.

“In contrast to Dell, each of the prospective acquisition targets listed below is a share leader in a growing market that would fit into [VMware’s] current three-pillar strategy,” he wrote. “Furthermore, an acquisition of any of the companies below would likely be accretive to [VMware’s] revenue growth and free cash flow, thereby driving stock price appreciation—making each far more financially compelling than a combination with Dell.”