The Curious Case Of VMware's Tracking Stock After The Dell-EMC Merger

Analysts believe that VMware, Inc. VMW’s new tracking stock will likely trade at a discount to its common stock, but estimating just how much of a discount is a difficult proposition.

Dell announced a bid for EMC Corporation EMC back in October. If the deal goes through, Dell will also acquire EMC’s 81 percent stake in VMware. Since the offer involved cash and stock, Dell plans on issuing shares of a VMware tracking stock. Deutsche Bank analyst Lon Parisi believes that the potential credit risk associated with the tracking stock and downward pressure from sales of the stock will likely mean that it will trade at a discount to VMware’s common stock.

Parisi turned to the options market to try to estimate just how much of a discount traders can expect. The starting point for Deutsche Bank’s calculation is the proposed terms of the deal itself:

1 EMC – 0.111 * VMW + $24.05

Parisi then generated implied deal close probabilities for tracking stocks trading at different discounts.



“By looking at the median 30%-0% deal-close probability spread (58.6%), we are establishing where the middle of where option-market investors feel the tracking stock discount to common stock should be,” he explains.

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By combining the median deal-close probability and the deal terms equation, Deutsche Bank estimates that the options market currently believes that the VMware tracking stock will trade at about an 18 percent discount to the common stock.

Disclosure: the author holds no position in the stocks mentioned.