BARCLAYS: A merger with Dell would be an 'obvious negative' for VMware shareholders

VMware CEO Pat Gelsinger


VMware CEO Pat Gelsinger

  • Analysts at Barclays said in a note Thursday that uncertainty over a potential reverse merger with Dell could lead to volatility in the price of VMware shares in the near term.
  • Barclays said that if the deal goes through it would be an "obvious negative" for VMware shareholders.
  • Still, Barclays retained its price target of $145, and wrote that VMware's fundamental business is on the right track.

Analysts are starting to get cranky about the impact that Dell's uncertain future is having on VMware's value.

In a note published Thursday, Barclays analysts Raimo Lenschow, Mohit Gogia, and David Rainville said they have faith in the fundamentals of VMware's business, but fear that uncertainty over whether or not a merger with Dell is imminent is creating wild swings in the stock price.
"The news has created significant volatility in the stock which may have driven some long-term fundamental investors away from VMW. Hence, we believe that these recent dynamics, added to the unorthodox VMware ownership structure could overshadow the strong fundamental momentum the business is seeing," the analysts wrote.

VMware stock, which traded at an all-time high of $150 in late January, has already seen a negative impact in the last few weeks. Shares currently cost around $125, though Barclays maintained its price target of $145.

Dell is considering a so-called "reverse merger" with the publicly-traded VMware, as a means of taking itself public without going through the usual IPO process. Dell currently owns 82% of VMware stock, and 97% of its voting interest, thanks to the 2015 Dell/EMC merger. This structure means that Dell could theoretically perform such a merger at any time, should it choose to go that route.

However, the uncertainty is accelerated by reports that Dell is also considering a more traditional IPO for itself, or just remaining a privately-owned company. All of these options are still on the table.

Should a VMware/Dell "reverse merger" go through, Barclays said that it would be an "obvious negative" for VMware shares in the near term. And in the meanwhile, uncertainty around the issue could cause some continued price volatility, analysts said. "VMware continues to be an attractive fundamental investment given its undemanding valuation, combined with its growth and margin profile," the note reads. "We also like the company's hybrid cloud positioning here with its partnership with [Amazon Web Services]. However, we accept that the recent news flow around Dell will create more volatility in the shares until we get more clarity."

Analysts at Morgan Stanley issued a similar warning last week, calling a Dell/VMware merger a "worst case scenario" for shareholders. Morgan Stanley analyst Keith Weiss also maintained a price target of $143 for VMware in a note published Thursday.

VMware is scheduled to report financial results for its fourth quarter and fiscal year 2018 on March 1.

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