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Dell Warns Investors VMware Share Decline Will Impact Final EMC Deal Price

Dell is warning investors that a whopping $14 billion drop in the market capitalization of VMware is going to negatively affect the final price of the blockbuster acquisition of EMC.

Dell is warning investors that a whopping $14 billion drop in the market capitalization of VMware is going to negatively affect the final price of the blockbuster acquisition of EMC.

A Dell spokesman said the U.S. Securities and Exchange Commission (SEC) asked the company to clarify language about the risks involved in the merger.

The total value of the blockbuster acquisition has dropped by nearly $8 billion from $67 billion as originally proposed to $59.5 billion, according to numbers provided by Dell.

[Related: Dell Sales Kickoff: Michael Dell Pushing Sales Force To Land New Customers As EMC Merger Grows Near]

In an SEC filing, Dell noted that "the market value" of the VMware tracking stock has "declined, thereby reducing the implied value of the stock portion of the merger consideration."

The Friday filing by Denali Holding Inc., the holding company for Dell, seeks to clarify the effect VMware's falling stock price will have on the Dell-EMC merger.

When the deal was announced in mid-October, the $67 billion price tag was the result of Dell's agreement to pay EMC shareholders $24.05 per share for EMC, plus 0.111 shares of Denali tracking stock tied to VMware's performance. At the time, it was estimated that the tracking stock would be worth about $9.10 a share.

"Sounds like the price is going down," said one Dell and EMC partner, who added, "It shouldn’t matter to us what Dell pays or what EMC shareholders get. All that matters is that the deal happens, or doesn't, and since we have no control over any of that, we just have to stay focused on things that we do well."

The VMware tracking stock is intended to "track" Dell's economic interest in VMware, and the value of that stock will fluctuate based on VMware's share price. That share price has dropped precipitously since the deal was announced.

On Oct. 9, the last business day before the Dell-EMC announcement was made, VMware, 80 percent of which is owned by EMC, had a market capitalization of $33.2 billion and a stock price of $78.65 a share. Now, its market cap is about $19.2 billion, and its stock price is hovering around $45.54.

If the deal were to close today, the more than 40 percent decline in VMware's share price would necessitate a corresponding decline in the value of the tracking stock.

A Dell spokesman said the EMC acquisition price of $24.05 per share was "locked, that doesn't move, but because VMware has moved down, the value of the portion of the merger consideration linked with the tracker is going to be in that range of decline."


The value of the tracking stock will be determined around the time the merger closes, based on the value of VMware shares in the days prior to the closing.

To make the EMC acquisition work, Dell intends to take on up to $49.5 billion in debt from a group of banks including Credit Suisse, JP Morgan, Barclays, Bank of America, Citi, Goldman Sachs, Deutsche Bank and RBC Capital.

It was reported last week that the deal had hit a snag when the banks requested more time to arrange the loans amid tightening credit markets.

Dell Chairman and CEO Michael Dell and EMC Chairman and CEO Joe Tucci have been adamant that the deal was progressing as planned and would close within the original timeline.

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