Last year, computer titan Dell announced a $65 billion buyout of data storage provider EMC (EMC). The current market value of EMC is around $55 billion. The deal is set to close later this year. The biggest obstacle to the deal -- financing -- was recently completed as Dell was able to secure some $20 billion from a consortium of major banks to make the deal happen.
With the financing resolved, the cash and stock deal for EMC provides an intriguing opportunity to net an above-average gain with minimal risk. Dell has offered EMC shareholders $24.05 in cash and 0.11 shares of a tracking stock in EMC's prized asset, VMware (VMW), for each share. At the time the deal was announced, the offer was worth $33 per share.
Today, EMC shares trade for around $28. VMware shares trade for $60, so based on Dell's offer terms, EMC shareholders are looking at $30.60 per share in consideration ($24.05 in cash plus $6.60, or 0.11 of the current VMware share price).
Observant investors quickly understand that the change in VMware shares creates a moving buyout price for EMC: As VMware shares go, so does the value of EMC shares. When the deal was originally announced, VMware shares traded for $90; they have since fallen to $60. It's my view that the decline in VMware shares actually creates a more intriguing opportunity. Over time, VMW is likely to be worth more as its business is very attractive, generates rich margins and has over $7 billion in net cash.
So the Dell/EMC deal provides enterprising investors with an opportunity worth exploring. As it stands, the current takeout price of $30.60 is nearly 10% above EMC's current price. A year-end deal completion translates into a 20% annualized return. But the portion paid in VMware stock could be worth more in the near term. To be sure, the VMware stock being given is tracking stock, but it will very like behave as common stock for trading purposes.
Dell still has to secure another $3 billion in high-yield bonds as well as clear some Chinese regulatory hurdles, but those conditions are likely to be satisfied in the near future. While a current deal discount might be warranted, this deal is likely to be completed and thus provides investors with a special-situation investment opportunity worth further investigation.