Dell makes tracking stock of VMware stake

The final piece in #Dell ’s complex $62bn acquisition of #EMC is set to fall into place on Wednesday, when an unusual tracking stock with a notional face value of more than $16bn starts trading in New York.

On paper, the new class of stock, whose value is tied to a large part of Dell’s investment in data centre technology company #VMware, will be worth even more than the shares sold at the time ofFacebook’s stock market debut in 2012, the biggest-ever US tech IPO.

But the use of a tracking stock structure — which gives holders no ownership of any underlying business or assets, and few rights — swims against the recent tide of corporate finance, and is expected to leave the new shares at a sizeable discount to their theoretical value.

Since the late 1990s, when tracking stocks were a faddish way for companies to get a valuation for their internet businesses without having to spin them off, “they’ve fallen way out of favour,” says Matt Billett, a finance professor at the University of Iowa who has studied the structures. “One of the really hard parts is understanding what the rights are, and what you own.”

Dell’s use of a tracking stock has been a key ingredient in its ability to take storage company EMC private. Without a publicly traded stock of its own to help finance the highly leveraged deal, Dell has turned to the 81 per cent stake in VMware it will acquire as part of the deal. Its new Class V shares will represent some 65 per cent of its stake in VMware — though holders will have no direct rights in VMware, and Dell will have the right to switch the underlying assets and businesses the shares represent in future.

Besides helping Dell finance the takeover, the use of tracking shares — treated as a class of the parent company’s own stock — will avoid the tax costs that would come from distributing VMware shares directly.

One ironic result will be to give Michael Dell, the Dell founder, a new group of public shareholders. Mr Dell has been vociferous about the attractions of operating away from the public gaze since taking his PC company private in 2013, arguing that it has freed him to take a longer-term view.

https://www.ft.com/content/d94e8662-744c-11e6-b60a-de4532d5ea35