Making Sense of Dell and EMC and VMware(a16z.com)
a16z.com
Making Sense of Dell and EMC and VMware
http://a16z.com/2015/10/26/dell-emc-vmware/
25 comments
Dell's capital cost will be lower in part because they aggressively paid down the debt from going private a few years ago. That has to be one of the most valuable reputations in the world -- probably saved over a billion dollars on this deal, just from having good credit. Yow!
Yes, its incredible how hard-won that trust is, and how much the market will reward you for it. Basically, investors are saying that they consider Dell to be a safe bet and are willing to charge less for it so that Dell may succeed and give them a great ROI for years to come
Yes, its incredible how hard-won that trust is, and how much the market will reward you for it. Basically, investors are saying that they consider Dell to be a safe bet and are willing to charge less for it so that Dell may succeed and give them a great ROI for years to come
As someone not terribly well-versed in the jargon of the finance and stock market worlds, this was a pretty good article for helping me make sense of it all. My head is spinning a little, but I've got the gist of it. Kudos to a16z for the good writeup.
I do have one question: can someone clarify for me what "tracking stock" is? I see that it has no voting rights and pays no dividends, but I don't understand how the market sets a price in that case. What is stock if not voting rights and dividends?
I do have one question: can someone clarify for me what "tracking stock" is? I see that it has no voting rights and pays no dividends, but I don't understand how the market sets a price in that case. What is stock if not voting rights and dividends?
Essentially tracking stock is a claim on the results of the income statement (revenues & expenses) for VMWare, whereas normal common stock is a claim on the income statement as well as the balance sheet (assets & liabilities).
Another way to think about it is that ETFs are tracking stocks. You do not have claim on the underlying stocks that the EFT holds, you only have claim to the return that holding those stocks would produce.
Another way to think about it is that ETFs are tracking stocks. You do not have claim on the underlying stocks that the EFT holds, you only have claim to the return that holding those stocks would produce.
This is similar in motivation to why Google separated out its shares - sometimes you want to let people invest without any associated political power of traditional stocks. While there's different types of stocks beyond even these like preferred, restricted, common, etc. it's nice to be able to separate those that have strictly economic concerns from those that have more business investment with shares.
A tracking stock might pay a dividend. It's not a whole lot different than normal stock, it is just linked to a segment of the company.
I think there is not much difference when it comes to the voting rights, a minority stake in a company that has some majority stake (or institutional investors that follow the board) doesn't have much in the way of meaningful voting rights anyway.
I think there is not much difference when it comes to the voting rights, a minority stake in a company that has some majority stake (or institutional investors that follow the board) doesn't have much in the way of meaningful voting rights anyway.
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It's worth noting that the normal VMW stock doesn't pay a dividend, either.
Wow; an excellent piece from a16z! Not only is it the best piece of analysis I've seen on the merger, it's arguably the best piece of (free) analysis I've seen on any merger before it actually closes. One question: Oracle has long been rumored to be interested in EMC, and they have a history with the Sun acquisition of surprising other potential acquirers. Especially with the "go-shop" clause, it seems likely that EMC is being explicitly shopped to Oracle; I wonder if the authors of the a16z piece see an Oracle acquisition of EMC/VMware as a possibility. It seems that Oracle has the cash on hand to make a better offer -- and that a combined Oracle/EMC makes more sense from a product mix than Dell/EMC. (Indeed, I wonder if a combined Oracle/EMC wouldn't be such a menace that there would be regulatory questions.) Are there other potential acquirers here that could derail Dell/EMC?
What, you get two large, amoral, incompetent, slow-moving and anti-competitive firms to merge? They'd destroy each other - can you imagine Joe Tucci and Larry Ellison trying to duke it out for supremacy?
Actually, on second thoughts that would destroy both EMC and Oracle. I say let it happen.
Actually, on second thoughts that would destroy both EMC and Oracle. I say let it happen.
Well, EMC management is retiring no matter what happens -- so I don't think it would be much of a battle. I also don't think that there is much of a contest between EMC and Oracle in terms of bad behavior: while they might have been similar five years ago, Oracle has distinguished itself with its astonishingly bad behavior in the wake of the Sun acquisition (e.g. Hudson, MySQL, Java, OpenSolaris, OpenOffice, and especially Oracle v. Google) -- and this is to say nothing of their extortion with respect to cloud revenue and license auditing.[1] The big loser here (and indeed, in all of these scenarios) is the EMC customer held hostage by ancient architectures -- and I'm sure that regardless of the outcome, plenty of EMC customers will be accelerating their plans of moving towards open infrastructure...
[1] http://www.businessinsider.com/oracle-customer-explains-audi...
[1] http://www.businessinsider.com/oracle-customer-explains-audi...
OK, fair point - that sounds more likely.
I can't see any way that Larry can acquire EMC without having his shareholders revolt. After they bailed out his personal investment in Pillar Data, this would basically be admitting what actually happened.
Well, it wasn't much of a bail out: Pillar was acquired with 100% earn-out -- in the words of the SEC filing on the acquisition[1] "we will not make any upfront payments to Pillar Data or any Pillar Data stockholders, including Mr. Ellison, or option holders upon the closing of the acquisition." (Pillar owed Ellison $544M at the time of the acquisition, and even that was converted into a slice of the earn-out.) The decision to buy Pillar wasn't without controversy (and indeed, there was a shareholder suit over it[2]), but that was also a much cozier situation than EMC. So the shareholders might revolt -- though seeing the Axis-like power of a combined Oracle/EMC, they also might not...
[1] http://www.sec.gov/Archives/edgar/data/1341439/0001193125111...
[2] http://www.bloomberg.com/news/articles/2013-10-03/oracle-s-e...
[1] http://www.sec.gov/Archives/edgar/data/1341439/0001193125111...
[2] http://www.bloomberg.com/news/articles/2013-10-03/oracle-s-e...
While I am happy to defer to someone who I think is a bit more connected through previous relationships to what's happening at Oracle, I will say the one thing I take issue with is the way they phrased the earn-out. It's based on net revenue, not income. This is Larry we're talking about, there's plenty of ways to make the revenue of Pillar look good enough to get paid, even if it's not REALLY making any money. Sell a database, get a "free" Pillar system. But hey, the Pillar system is what you really paid for, we gave you the licensing for free!
I happened to be writing a research paper on EMC before the deal was announced and am still writing it. This article nails my thoughts on the deal in such a way that I'm kind of disappointed - here I was thinking I was going to be saying something unique about the under-rated role of activist investors, and the iffy bet on grow-or-die. Still, I'm totally stealing some of those graphics for my paper.
Wow, that was by far the most comprehensive and best article I've read on this subject.
Rivals anything I've seen in the wsj or other papers about the deal. I haven't seen a longform article like this on a16z before, very neat.
Rivals anything I've seen in the wsj or other papers about the deal. I haven't seen a longform article like this on a16z before, very neat.
Awesome analysis! Quite difficult to distill something so complex into a clear and cogent analysis. Someone's MBA education certainly paid off. :)
Oracle would certainly be one of the interested parties for the go-shop. Oracle has been shaking down clients because of ambiguity around how to use virtualization (http://fortune.com/2015/09/14/oracle-plays-hardball/) so acquiring VMWare would help strengthen their hand - they could rewrite VMWare license agreements to remove any remaining ambiguity ;)
And kudos to Tucci for buying up VMWare at the right time. This deal is mostly about VMWare and Tucci spotted it at the right time.
Oracle would certainly be one of the interested parties for the go-shop. Oracle has been shaking down clients because of ambiguity around how to use virtualization (http://fortune.com/2015/09/14/oracle-plays-hardball/) so acquiring VMWare would help strengthen their hand - they could rewrite VMWare license agreements to remove any remaining ambiguity ;)
And kudos to Tucci for buying up VMWare at the right time. This deal is mostly about VMWare and Tucci spotted it at the right time.
This piece is awesomely detailed, but if you're looking for a higher-level recap, we wrote up the a16z podcast on the same topic: http://www.volleythat.com/a16z-podcast/2015/10/18/a16z-podca...
The information us excellent for a someone like .e who knows nothing about M&A. However the consipra t theory undertones were perhaps a little too cute; they insinuate that dell colluded with emc to structure the original VMware deal so it would enable a future mega-merger. It does make for good reading...
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Great write-up! Even as someone on the inside of one of those companies I learned a lot.
A couple points stuck out to me; one the comment that Dell's capital cost will be lower in part because they aggressively paid down the debt from going private a few years ago. That has to be one of the most valuable reputations in the world -- probably saved over a billion dollars on this deal, just from having good credit. Yow!
The other that's interesting perspective is noting that EMC alone could pay the debt burden here with what it's been spending on share buybacks.
It's also interesting that we have massive moves from industry participants going both directions right now: HP splitting, and EMC/Dell merging, both looking to unlock extra value.
Something in me tends to not trust the 'break em up' push from activists; I guess I tend to believe synergies are real things. At some level, maybe activists don't disagree, but think they encourage bad or lazy behavior, and break-ups force harder thinking and focus from management teams that are fat and happy.
If that's true, my bet would be on Dell turning this into something good; Michael seems very motivated to me from watching his moves over the last few years.