Dell's IPO That's Not an IPO: What You Need to Know

A few years after leaving public markets, Dell Technologies Inc. takes a back door to return.

The company announced Monday a complex plan of redemption to new public that bypasses a traditional initial public offer, underwritten. Dell intends to convert a special stock following the company's participation in VMware Inc.

VMW, + 10.24%

known as class V shares, in common class C shares in Dell that will trade on the stock exchange. Investors will also have the opportunity to cash out the Class V shares created during the huge merger between Dell and EMC, and Dell says a special dividend will help VMware finance the deal.

Dell is offering $ 109 in cash for each Class V share, 29% more than the closing price of the stock on Friday. Dell's Class V follow-up shares rose 7.5% after the announcement, to about $ 91, while VMware shares jumped 10.2%, their largest gain over a day in the industry. more than two years.

Not to be missed: the IPO market has the heaviest quarter in three years, with more transactions on the way

Analysts seem united in praising the transaction, avoiding the prospect of a two companies reverse merger. Cowen analyst, Gregg Moskowitz, said the deal ruled out the threat of a merger "undermining the value," which had acted as a surplus on VMware shares.

"This is a clearly favorable outcome for VMware shareholders given the dividend and what we believe to be the removal of the reverse merging threat in the foreseeable future," Moskowitz said in a note. Moskowitz outperforms VMware.

Deutsche Bank analyst Karl Keirstead, who has stated his goal of $ 120 and his purchase note on Dell's class V shares, sees the transaction as positive for class shareholders V and VMware. While Dell retains the right to pursue a merger with VMware, we conclude that public stock market access, improved Dell fundamentals, and a special VMware dividend make it a highly unlikely event for the next few years. years, "wrote Keirstead. in a note.

Read: Pivotal Software Shines in Post-IPO Profit Report

Following the Dell announcement, VMware announced that it was paying an outstanding dividend of 11 billion and that Dell's share will help finance the deal, which is expected to close in the fourth quarter.

FBN Securities analyst Shebly Seyrafi said that about 9 billion USD of dividend would go to Dell and the rest to VMware shareholders. A disadvantage is that VMware is left with $ 1.63 billion in gross cash, while the net cash from $ 8.34 billion to a deficit of $ 2.6 billion, according to Seyrafi. "But we estimate that VMware will have a $ 3.34 billion F2019 [free cash flow] so we believe that VMware will return to a positive net cash position at the end of the 2019 financial year."

Patrick Moorhead , a senior analyst at Moor Insights and Strategy, told MarketWatch that the dividend was probably the result of negotiations between the two parties.

"The result was clearly that VMware wanted to stay separate, but they also wanted to show that they were part of the happy Dell family, "he said.

Moorhead explained that if Dell and VMware had completely merged, the distribution partners might have seen VMware differently, and" that would have caused a lot of discussion and some handshakes by companies like HPE

HPE, + 1.30%

Cisco

CSCO, -0.51%

and Lenovo

0992, + 4.94%

which are all pathways to market for VMware. "

Moorhead said Dell likely wanted to take advantage of favorable equity markets, especially for tech companies.Although Michael Dell does not want to deliver quarterly earnings reports and face regular Wall Street issues, Moorhead believes that the company has had enough time as a private company to make long-term adjustments.

Analyst Roger Kay of Endpoint Technologies Associates said that Dell was able to close the deal. Case because the company was in good financial shape, Dell having published strong forecasts for the entire year during a conference call on Monday.

"What they say, that 's Is that their growth machine will be able to pay the debt and overcome everything, "he told MarketWatch.

Kay also suspects that the new tax bill may have the transaction has a "large tax debt" resulting from its profits abroad.

"Apple

AAPL, + 1.12%

has the same type of problem, but Apple has so much cash and so little debt that she could pay the tax bill and go from there. before, "said Kay. He said about Dell, "as a financial engineer, there is hardly anyone in the game."

See also: Why Dell Can – be entered into an agreement with EMC

VMware, the company has reaffirmed its second quarter earnings guidance of $ 1.49 per share, out of a diluted number of shares of $ 413 million. shares, on a turnover of $ 2.15 billion, and revised its annual earnings outlook. VMware now posts an adjusted profit of $ 5.99 per share based on a diluted share count of 414 million shares, compared with $ 6.14 per share for $ 410 million. shares and a turnover of $ 8.78 billion. Analysts surveyed by FactSet estimate earnings of $ 1.49 per share on a 2.14 billion-dollar business in the second quarter and $ 6.15 on a $ 8.79-billion business figure for the year

After the big jump on Monday, the VMware stock is up 29.3%, while the S & P 500 index

SPX, + 0.31%

gained 1.7% in this time.