One of VMware Inc.'s largest investors called on its board to end talks with Dell Technologies about a potential reverse merger, arguing it would be a "terrible deal" for the company and shareholders.
Jericho Capital Asset Management and its affiliates, which said they collectively hold a 1.8 percent stake in VMware, making them one of the company's top 15 investors, said in a letter that a reverse merger would derail the company's current prospects. The resulting public company wouldn't appeal to its growth-oriented investor base and would likely trade at a steep discount to what it would as a standalone firm, according to the letter.
Jericho Managing Member Josh Resnick said in the letter that such a deal would benefit only Dell's interests by servicing its debt with VMware's cash flow instead of funding buybacks or other acquisitions.
"Even the most casual observer can see that VMW gains nothing by saddling the company's faster growth, net cash, highly strategic software business with the dead weight of Dell's slower growth, heavily debt-laden, legacy hardware-dependent entity," Resnick said, referring to the company by its ticker.
Resnick said his New York-based fund generally refrains from commenting publicly on corporate proposals but felt compelled to speak out given the "one-sided" nature of the proposed transaction. VMware is the largest position in Jericho's fund.
A spokesman for Dell declined to comment, citing a quiet period that the company entered into after disclosing that it's evaluating business opportunities. VMware didn't immediately respond to requests for comment.
After a giant leveraged buyout of EMC Corp., years of creative corporate structures and financial maneuvering, Michael Dell is trying to bring all the pieces of his technology empire under one, publicly traded roof.
Round Rock-based Dell confirmed in a regulatory filing last month that it was weighing options, including an initial public offering or business combination with VMware.
Dell controls VMware as well as owning his namesake company, creating a barrier to Jericho arguing that minority holders should be heard.
Dell Technologies includes assets acquired for $67 billion with its 2016 acquisition of EMC, which owned a controlling stake in VMware. The rest of VMware's shares are publicly traded, as is a tracking stock under the symbol DVMT.
If Dell pursues a combination with VMware, its stock would be used to help acquire the private company, people familiar with the matter have said. The merged company would also subsume the tracking stock, they said.
Dell's purchase of EMC almost tripled the company's debt at the time.
A reverse merger could limit VMware's ability to retain employees and partner more broadly with Dell's competitors, as well as possibly disrupt its current business strategy, according to the letter from Jericho.
If VMware decides to explore strategic alternatives, it would be better served by pursuing deals with companies other than Dell, according to the letter. Possible acquisition targets could include software firms such as Red Hat Inc., Palo Alto Networks Inc., Splunk Inc., Tanium Inc. or Rubrik Inc., Resnick said.
Buying any one of the companies Jericho Capital has proposed would fit with VMware's current strategy and be accretive to its revenue growth and cash flow, Resnick said.
He said he would like to meet with the independent members of the board to discuss the matter. "VMW is much better off considering other strategic alternatives instead of a reverse merger with Dell," he said.
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