On the surface, Dell’s $67 billion buyout of EMC would seem to be all about going private. But this enormous tech deal also means the return of Dell to the public markets, just a few short years after the company fled them.
That people have missed this point is not surprising, since Dell has not trumpeted it. But a person close to the company who spoke on condition of anonymity has confirmed that Dell will essentially become a public company with its acquisition of EMC.
The reason is the tracking stock that Dell will issue as part of the transaction. EMC owns roughly 81 percent of VMware, which before the announcement of the deal had a market value of more than $35 billion. Dell could not afford to buy all of EMC, including the interest in VMware. So instead, Dell is paying the cash consideration and issuing a tracking stock to EMC shareholders.
The tracking stock tracks EMC shareholders’ interest in VMware and is intended to reflect part of the value of the VMware interest that will be held by Dell. In all, according to the person close to Dell, former shareholders of EMC will hold tracking stock equivalent to about 65 percent of VMware, with Dell directly retaining about 17 percent and the rest publicly traded.
It’s a neat trick. By issuing this tracking stock, Dell can afford to buy EMC, something it otherwise couldn’t, and still keep control of VMware.
But there are costs here, and that is where the going public part comes in.
A tracking stock is really just a new class of stock issued by the company. Tracking stocks have been around for a few decades. The trend began when General Motors used a tracking stock for its Hughes subsidiary and experienced a boom during the tech bubble. Back then, tracking stocks were issued by companies like Walt Disney to mimic an interest in Internet businesses (Go.com, in Disney’s case) while also keeping control with the main company.
But tracking stocks were unwieldy beasts and created legal issues as companies struggled to reconcile the fact they controlled and owned a company but had to pay heed to the holders of the tracking stock, which really was a share of the company itself. For example, a business decision hurting the business subject to the tracking stock to the greater benefit of the whole company could be challenged by the holders of the tracking stock.
Dell’s tracking stock solves some of these issues. It is not based on a business, but rather simply tracks VMware shares. And again, it is not even an interest in VMware stock, but instead is stock in Dell with the only rights to the proceeds of any sale of VMware shares or any dividends paid on VMWare shares. It does not raise the same legal issues as a stock that tracks an entire subsidiary.
But since a tracking stock like this will be a class of Dell’s own stock and publicly held, this will mean that Dell is about to become a public company. It will have to register the tracking stock (which is really just Dell stock) with the Securities and Exchange Commission. More important, Dell will again be subject to all of the disclosure requirements of being public. (The company already does disclose some financial information confidentially to its debtholders.)
Dell will have to disclose its financials and other information about the company and file quarterly and yearly reports. Again, this is because the tracking stock is really stock in Dell that gives the holder the right to all of the profits from the VMware stock held by Dell. And so Dell must report all of its information.
So Dell is triumphantly, if not quite openly, returning to the public markets. The only difference is that Dell’s equity will be controlled by Michael Dell, Silver Lake and the rest of the buyout group. There will be no pesky shareholder to deal with who can influence this group. Still, it will be interesting how the public spotlight on Dell’s results changes views of the company. And despite Michael S. Dell’s complaints about operating in the public markets, it clearly couldn’t have been so bad for Dell if it is so quickly returning.
It remains to be seen what happens with this tracking stock in the future. The arrangement gives Dell control of VMware for the foreseeable future and allows Dell to include VMware in its one-stop-shopping strategy, the reason it is buying EMC in the first place. In addition, it may be difficult to unwind the tracker even to arrange an exchange of tracking stock for actual VMware stock on a tax-efficient basis. It means that VMware is not going to be bought out any time soon, the reason its shares fell almost 10 percent when the deal was announced.
On the flip side, Dell may have to buy out the tracking stock at some point if it wants to fully regain control of VMware. This will have to wait until Dell has more cash. But still, even then Dell may choose not to do so given that right now it will have control of VMware without having to pay tens of billions of dollars. The only price really is that Dell is back in the public eye, and that seems to be a cost Dell is willing to bear.
Welcome back to the stock market, Dell. We missed you.