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‘Independence Day comes early’: Wall Street is psyched at Dell’s decision to leave VMware alone (VMW)

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VMware investors are rallying.

VMware stock popped 9% over the weekend following reports that Dell would not pursue a reverse merger with the company.
Markets Insider

Shares for VMware, a cloud computing and virtualization company, are up 9% from the closing price Friday on news that its privately-owned parent company Dell won’t pursue a so-called “reverse merger,” which would have taken Dell public but could’ve decimated VMware’s value for shareholders.

Morgan Stanley, one of Wall Street’s toughest critics of the deal, raised its outlook on VMware on Tuesday in a note titled “Independence Day Comes Early.”

“With the bear case threat of a reverse merger with Dell effectively shelved, investor focus turns to fundamentals – and recent fundamentals have been strong,” Morgan Stanley analyst Keith Weiss wrote.

Morgan Stanley raised its price target for VMware from $150 to $175, citing high billings growth in the first quarter, and sustained earnings per share.

Dell, which owns 81% of VMware, plans to take itself public through the buyout of a VMware tracking stock, DVMT.

As part of the deal, VMware’s board of directors announced an $11 billion special dividend to its shareholders, worth around $27 per share. Dell will use the cash it gets from the dividend to finance the tracking stock deal.

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While VMware’s 2019 revenue won’t be impacted, the company did lower its guidance on earnings per share.

The company expects to see $5.99 in adjusted earnings per share for fiscal year 2019, down from the $6.14 anticipated before the dividend was announced.

The company also lowered its guidance on free cash flow to $3.32 billion, down $50 million from its earlier guidance of $3.27 billion for fiscal year 2019.

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