VMware Shares Hammered After Dell-EMC Deal Unveiled, Analyst Warns Of 'Nightmare' Scenario

As the dust settles from Dell's $67.1 billion bid to acquire EMC, there's one group that doesn't appear to be getting caught up in the excitement: VMware investors.

VMware shares dropped 6.9 percent in premarket trading Monday and closed down 8.1 percent, at $72.27. At one point, VMware shares were trading lower than they had in more than two years.

What's causing the angst? VMware will remain a publicly traded vendor if the deal passes regulatory scrutiny, and there are no signs that Dell plans on making any major changes to the virtualization vendor's go-to-market approach.

[Related: Dell Makes $67 Billion Bid To Acquire EMC-VMware, Partners See New World Order In Enterprise]

But according to one Wall Street analyst, there's one aspect of the Dell-EMC deal that could create problems. EMC shareholders would get a "tracking stock" in VMware that represents 53 percent of the virtualization vendor's market value, according to a report from Investor's Business Daily.

That means EMC, which owns around 80 percent of VMware, would no longer be able to control how many VMware shares are traded on the open market, which could lead to greater swings in response to market shifts.

"It's a nightmare situation for VMware shareholders," Daniel Ives, an analyst at FBR Capital Markets, told Investor's Business Daily.

A VMware spokesman declined to comment directly on Ives’ commentary, but did say that the Dell-EMC deal "is expected to accelerate VMware’s growth across all of its businesses through the increased opportunities to benefit from synergies with Dell’s solutions and go-to-market channels."

"VMware will benefit from the operational agility that comes from our majority shareholder being privately controlled and from being part of one of the top three transformational IT companies in the world," the VMware spokesman said.

Spokesmen from EMC and Dell declined comment.

VMware also shared preliminary results for its fiscal third quarter, reporting revenue of $1.67 billion, up 10 percent year-over-year, and earnings of $1.02 per share. Wall Street analysts were expecting $1.66 billion and 99 cents per share.

An executive from one national enterprise solution provider that works with VMware said he's concerned about the virtualization vendor potentially being under the Dell umbrella.

The executive said he believes VMware's integration of NSX software-defined networking with security offerings from Palo Alto Networks and Check Point "may get stifled" if Dell tries to push SonicWall into NSX-related opportunities.

"I’m concerned that this may open the door for more customers to start looking harder at Microsoft Hyper-V if they aren’t a Dell shop," said the executive, who didn't want to be named in order to protect his relationships with other vendors.

Another solution provider executive said there's a perception among his clients that Dell is nowhere near as advanced or enterprise-savvy as VMware and EMC, and he believes this could also be factoring into the drop in VMware's share price.

"EMC and VMware are like major leaguers that are being relegated to the minor leagues," said the executive, who also spoke on condition of anonymity.

While EMC has done "a pretty good job" in allowing VMware to run as an independent entity, it's not clear that Dell will bring the same approach to its oversight of VMware, said the executive.

In nearly 12 years under EMC, VMware has grown into a $6 billion enterprise software powerhouse. Although its core server virtualization business is slowing, VMware is expanding into storage and networking, and Wall Street is generally bullish on its prospects.

That's why some VMware partners aren't concerned by the market's reaction to the Dell-EMC deal, and see it more of a knee-jerk reaction to changes on the scale of those outlined in the Dell-EMC deal.

"I don’t think there’s long-term unhappiness about the viability of an independent VMware from investors or management. I think it’s just stock price reacting to the net effect of these plans from a market perspective," said another VMware partner executive, who also didn't want to be named.

PUBLISHED OCT. 12, 2015