Yesterday Dell announced a plan to buy EMC. Since EMC owns VMware, this effectively means Dell announced a plan to buy VMware.
This is not a done deal. If it goes through, it will be the largest tech acquisition in history (at $67B), but EMC has 60 days to “shop around” for another higher offer, and the deal will also have to be cleared by regulators. So apart from the FUD overhang, we’re looking at business as usual for the next 9 months.
In the desktop virtualization space, the Dell/EMC part of the deal is pretty boring. One huge compute & services company buys another huge storage & services company. Makes sense.
The VMware part of the deal is interesting though, so that’s what we’ll dig into.
Would Dell “own” VMware? Will VMware be independent? What’s this tracking stock thing?
VMware is currently owned by EMC. The publicly-traded portion of VMware is only about 20% of the company, meaning 80% of the shares (and the profits and voting rights) are owned by EMC. This is very different than many companies. Citrix, for example, has about 160M total shares (shares outstanding), but 158M of those are owned by the public. So Citrix is 99% owned by the general public whereas VMware is only 20% owned by the general public. (This varies from company-to-company. TechTarget has 53% of its shares owned by the public.)
So even though VMware is a public company, they’re not too public, meaning EMC can essentially do whatever they want, including influencing the leadership, the board, the products, the strategy, and anything else they want.
Over the years EMC has been pretty hands-off. (Apart from replacing Diane Greene.) Anyone who’s attended VMworld or who follows what VMware is doing in the storage virtualization space knows that EMC certainly isn’t “controlling” VMware too much or limiting what they can do. And why should they? EMC gets 80 cents of every dollar that VMware makes. Buying VMware was a brilliant move (back in 2003!!) by EMC.
Assuming this deal goes through, now instead of EMC owning 80% of VMware, Dell will own 80% of VMware. So the question is whether Dell will exert pressure on VMware in a way that EMC didn’t?
Before you go too far thinking about what Dell would do with their 80% of VMware, know that Dell is planning on selling part of EMC’s 80% stake in VMware to raise money… to buy EMC! :)
This is where that so-called “tracking stock” comes into play. A tracking stock is where a big company creates a stock which “tracks” one of their divisions. It’s something that happened a lot in the dot-com boom as huge boring old companies created tracking stocks for their internet divisions, but it’s not something that is as common today.
What’s interesting about the tracking stock shares is that while they share in the profit (and loss) of the division that’s being tracked, they typically do not have voting rights or access to dividends. This makes them less valuable than the “primary” stock and they typically trade at a lower value.
Dell is going to create a tracking stock for VMware and sell an additional 53% of VMware to the public. (Part of those new tracking stock shares will be given to existing EMC shareholders, who will get $24.05 in cash and 1/9th of a share of the new VMware tracking stock for each share of EMC that they own.)
This means that VMware will now be 73% owned by the public—20% in the primary stock and 53% in the tracking stock—with Dell owning the remaining 27% percent of the shares. (This also means that Dell will still be able to out-vote the public.)
Dell plans to raise $15B of the the $67B needed to buy EMC via sales of the tracking stock to the public.
You might have noticed that VMware’s stock actually went down today on the news of the potential Dell acquisition. This is not because everyone is saying, “OMG THIS DEAL IS AWFUL FOR VMWARE!”, rather, it’s because VMware’s stock was in low supply (since only 20% was public), so the general fear for investors is that all these new shares of VMware are going to show up on the market and will move the price down. Of course these tracking stock shares are a second-class stock, but that doesn’t affect the dynamics of a market panic.
What would this mean for EMC?
This deal will be great for EMC for several reasons.
First is that EMC’s stock was trading around $27, so $24.05 in cash plus 1/9th of the VMware tracking stock is a value of around $33 per share. So that’s some instant profit.
Second, it solves the Elliott problem. We know Elliot due to their involvement with Citrix (here, here, and here), but Elliott was essentially doing the same thing to EMC. So EMC being bought by Dell means they’ll be private and Elliott will be out of the picture. (Elliott released a statement today saying they “strongly supports” the deal, which makes sense since they’ll make somewhere around $300M in profit based on the number of EMC shares they own.)
Third, this deal lets EMC realize some of the value that’s been locked in the 80% of VMware that they own. This was always a challenge for them in the past, because they couldn’t just dump their shares onto the market without causing VMware’s stock price to tank, so throwing in 1/9th of a share of tracking stock of VMware to each EMC shareholder gets generates about 9 bucks an EMC share and gives them the part of the tracking stock share. Win-win!
Fourth, they’ll be private again, which is awesome. Being a public company sucks. (See above note about TechTarget, then buy me a beer and ask me about “in-quarter revenue."
What would this mean for vWorkspace?
I can’t imagine how little the architects of this deal care about vWorkspace. It’s a tiny, tiny blip on Dell’s $60B annual revenue. (Or somewhere in there. We don’t know since they’re private now.) Combine that with EMC’s $24B in revenue, and vWorkspace is, what, 0.02% percent? So no one cares. (Except us, of course.)
The problem with vWorkspace being owned by the same people who own VMware is that (as Gabe puts it), all the “gotta have” features of vWorkspace are for Hyper-V.
Really there are two options for vWorkspace. It could continue to exist as a product, or it could be rolled into VMware Horizon. (Or I guess it could be sold, but how much value would Dell get from that versus the value of not having a competing product on the market?)
The case for keeping vWorkspace a standalone product isn’t particularly strong. I mean why split the resources?
VMware is going all out against Citrix, so if there is any IP at all from vWorkspace that VMware can incorporate into Horizon, you can bet they’re going to do it. I’m not sure what exactly that would be. Horizon and vWorkspace have fundamentally different architectures (and again, vWorkspace really is geared towards Hyper-V and RDP). Really I see this more like an episode of Storage Wars where they send Shawn and Sumit over with the instructions, “See anything you want here? If not we’re pitching it."
In the past, Dell vWorkspace employees have talked about walking the fine line of having a good product while not wanting to piss off Citrix or VMware. I guess there could be an option where they are now allowed to piss off Citrix and it doesn’t matter if they piss off VMware, but really who am I kidding? vWorkspace is dead.
What would this mean for VMware?
In the grand scheme of things, I can’t see much changing for VMware. They were 80% owned by a huge storage company before. They’ll now be 27% owned by an even huger storage/compute company. No biggie. Probably better for them, actually.
This isn’t to suggest that this deal won’t affect things in the short term.
First, several people I talked to yesterday (I spent 7 hours on the phone talking about this deal!) so that mutiple VMware employees called up friends of theirs at other companies asking, “So.. are you hiring?"
It’s not that they all want to jump ship because all is lost, rather, it’s just that there’s uncertainty where there never was before. As one person I talked to phrased it, "A deal like this is like having open heart surgery. You have to put the rest of the body to sleep. Some people don’t wake up, some get spooked, some get disoriented… Prior to this, VMware was comfortable. You show up every day. You get your stock options. Now it’s less comfortable."
Having the weight of Dell behind them only helps VMware in the war against Nutanix (selling KVM) and Hyper-V. They’ll also have access to all of Dell’s software (all the former Quest stuff and more), which certainly can’t be bad.
The only real negative for VMware is that their competitors are going to dial up the FUD war saying, “Who knows what’s going on over there. You need to buy us. We’re stable!” (Well, maybe Citrix can’t say this, but everyone else can.)
What would this mean for Wyse?
Remember that Dell owns Wyse now and Wyse and Citrix have been BFFs for twenty years. I assume this doesn’t mean that Wyse stops making HDX Ready thin clients or anything, and Dell isn’t going to walk away from the $70m or whatever they do selling to Citrix customers.
Then again, Dell’s 27% ownership of VMware is worth way more than the revenue that Wyse brings to the table, so I can see them working hard to make sure that Wyse and Horizon are damn well integrated. (Both in terms of product integration and bundling.)
What would this mean for Citrix?
The first thing Gabe said was, “I hope we finally get to write the ‘Cisco is buying Citrix’ article.” :)
Maybe. We could also see the “HP buying Citrix” article or the “Microsoft buying Citrix” article.
For sure I can’t see Citrix going private and then just sitting around as this $3B private company. Someone is going to own them.
The Bottom Line
- This deal is not done and won’t close until the middle of next year. EMC could be bought by someone else, a bidding war could ensue, and/or regulators could block it.
- VMware will be less owned by Dell than they are currently owned by EMC.
- VMware will be able to incorporate some of the IP from Dell into their products.
- The only people who really know how this deal is going to work are the attorneys.
- It’s a fun time to be an industry watcher!