Tracking Shares and Dell’s Arrangement with VMare
About 25% of Dell’s $67 billion valuation for EMC Corporation centers mainly on the kind of security that most of the companies on Wall Street would consider as the “artifact of technology”; this is known as the tracking stock. The question now is: should we be worried?
Approximately $9 of the $33.15 per share takeover price will be taken by letting EMC holders to hang on to the company’s stake in VMware Inc., a software manufacturer based in Palo Alto, California, which Dell acquired somewhat 11 years ago. Instead of handing over the stock, Dell will be issuing securities that are made to mimic shares of VMWare that are traded publicly. As a result, EMC holders will be getting market shares that they couldn’t touch before; but, they won’t exactly own them, either.
These tracking stocks will be registered publicly, exchange-traded, and is actually a share of the common stock of Dell’s holding company (which will be going public after 2 years of being private). Note, however, that these shares do not bear the same rights as other Dell shares. First of all, Dell and Silver Lake (Dell’s private equity backers) will be having about 10 times as many votes per share compared to the tracking stock; therefore, they will still be having full and firm control of the company.
The economic rights for those holding these tracking stocks will be largely based on the performance of VMware, and not the rest of the Dell/EMC. Dell can exchange these stocks for VMWare shares whenever it wants. Should Dell decide to sell its VMWare stakes, the proceeds will go to the shareholders of these tracking stocks; however, it can choose whether to do it in cash or stocks or other ways.
The concept of tracking shares that reflect the set of assets without the normal privilege of ownership dates back to the 1980s and it became the “thing” during the dot-com era. The 2000 market crash was a nightmare among lion’s tracking shares. A handful still actually exists in the media empire of John Malone; however, most of the others have retired.
“My experience had been that they’d gone away, they were popular in the late ‘90s but they all either converted into real spinoffs or get folded back into the parents. They’re a flaky security. They don’t have the same characteristics of a real spinoff — it’s a way to highlight the assets without giving up control. They’re kind of a ‘trust-me’ security,” John Cornell, the founder and editor of Spin-Off Research based in Chicago, said during a phone interview.
What Dell is doing today is that they are somehow giving back to the public markets. The only difference is that the equity of the company will be controlled by Michael Dell, Silver Lake, and the rest of the buyout group. There is no room for pesky stockholders in order to only deal with those who will have a great influence. Still, it is quite interesting how the spotlight on Dell is changing the public’s view of the company. And although Michael Dell complains about operating in the public market, it clearly couldn’t be bad for the company if it has indeed returned to the arena quickly.
The future of these tracking stock remains to be seen. The arrangement between Dell and VMare is the reason why Dell bought EMC in the first place. Additionally, it would be difficult to unwind the tracker and even to arrange the exchange of tracking shares for actual VMWare shares on a tax-friendly basis. Thus, VMWare isn’t going to be bought out just yet; this is primarily the reason why their shares decreased by 10% when the deal was announced to the public.