How Carl Icahn's Bold Move Helps Dell's Tracking Stock

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Carl IcahnThe decision to take a major position in the Dell tracking stock VMware seems optimistic for the tracker because it is less likely that Michael Dell will take actions that are disadvantageous for tracking investors and more likely that Dell offers a significant bonus for entering into an agreement.

The tracking stock, Dell Class V Technologies (symbol: DVMT), rose 60 cents to $ 95 trading Monday, while VMware (VMW) ranges from $ 3.70 to $ 144.04, which has reduced the gap between the two shares to about 34% against 36% Friday.

The price action might reflect the decision of some investors to establish an arbitrage system involving a long position on DVMT and a short position on VMware. This trend was popular until early 2018, when the gap has soared to reach a reduction of about 50%, compared to about 30%, in a climate of 39%. uncertainty about what Dell would do with the tracking inventory. Many arbs were burned in the trade, but some investors may have put it back, emboldened by Icahn's large participation, which increases the chances of a favorable outcome for the tracker.

Icahn announced Monday that it held 8.3% of the tracking stock and that it was considering opposing the Dell deal. As part of the current offer, a Dell individual would pay $ 109 per share in cash and newly issued shares for follow-up. DVMT has historically traded below the stated value of $ 109 per share on this transaction since its announcement in July, as investors rated Dell's equity at a lower price than the company assumed.

Barron explained in detail the resistance of tracking stock holders, including Icahn, to Dell's bid because it offers a low price for the tracker over the course of action of VMware, a publisher of high value software.

The participation of Icahn, combined with the opposition of other DSLR holders to the Dell offer, probably condemns him. The problem is Dell's next move. One possibility is a softened offer for the tracking stock.

Holders of DVMT thought that Dell could offer a little more than the current value of the DVMT stock or take steps to strengthen the current offering of $ 109 per share. The idea here is that Dell could get enough support with such a plan to reach an agreement. Still, Icahn takes a hard line on the price, writing that the discount on any transaction should not exceed 10%.

In a very specific letter, Icahn wrote: "We believe that Dell's next step will be to modestly increase the price of the transaction in order to receive voting commitments from those willing to sell at a discount, but not as big as the current 36% discount. We strongly believe that the shareholders of DVMT should not consider accepting any discount, but if they do, this discount should in no way be greater than the 0-10% discount assumed in the first DVMT Tracker broadcast. Even then, notice, I just say "consider".

Icahn wrote that the possibility of a Dell IPO followed by a forced merger of the tracking stock into a product common to Dell – authorized by the stock tracking documents – poses an "empty threat" Of Dell because of the difficulty that Dell encounters to succeed in an IPO.

It also asserts that Dell's board of directors has a fiduciary duty to all of its holders – both Michael Dell and Silver Lake Partners, as owners of Dell's shares and investors in the DVMT tracking. Icahn wrote that an IPO / forced conversion of the tracking stock that does not include "minority shareholder guarantees" could be exposed to a potential injunction and damages.

Another bullish factor for the tracker is Icahn's statement that he would consider countering Dell's higher bid with a personal offer. He later told CNBC in an interview that without assurances, he would be "willing to buy more, I think, under the right circumstances."

In this interview, he ransacked Dell and Silver Lake Partners to try to "literally steal" $ 11 billion from the shareholders of DVMT. This calculation is based on the recent $ 55 price differential between DVMT and VMware shares multiplied by 199 million outstanding DVMT shares. About Dell and Silver Lake, Icahn said, "So you have two guys who will win $ 11 billion to do nothing. It's second to none, even on Wall Street standards. "

Dell and Silver Lake had no immediate comment.

Another bullish factor for stock holders is a report released Monday by a New York tax expert. Robert Willens. In a customer memo, Willens has exposed the possibility of a transaction in which stockholders tracking could get the underlying VMware shares held by Dell.

Such an action would not normally take place without adverse tax consequences until 2021 – five years after the closing of the purchase of EMC this led to the creation of the tracking stock. However, Dell could sell to VMware, as part of a duty-free transaction, an active business that would allow the subsequent distribution of VMware stock to tracking holders on favorable tax terms, writes Willens.

It's unlikely to be a transaction that Dell would voluntarily achieve because it would bring little or no value to Michael Dell and Silver Lake, but it may be more difficult for Dell's administrators to approve any future transaction. not remunerating the holder of a DVMT holder, close to the full value of his stock Barron.

Icahn or any opponent of a future agreement negotiated between Dell and the trackers could argue that the Dell board of directors should have considered this type of transaction as part of its fiduciary role vis-à-vis all shareholders.