Some $DVMT updates and additional thoughts
In general, I think everything I said was within the realm of reasonableness. The biggest pushback I got was on my part about bumping in cash instead of stock. Several readers (correctly) pointed out that I shouldn’t use the stub equity value to value Dell’s equity; instead, I should use the implied equity value (i.e. the stub equity value plus the value of all of their equity stakes) because that’s the market cap Dell will actually have. A silly mistake on my part (though, to be fair to myself, mistakes tend to get made when you’re rushing through a situation / deal in less than 24 hours!).
- Dell's ability to bump with equity also presents an interesting call option around the market’s valuation of the stub. Dell is going to file an S4 in September and host an analyst day later in the month. If they can start to get the market semi-excited about Dell equity (it doesn’t even take a massive multiple; just get some type of positive stub value), DVMT stock will start to creep up and Dell can give DVMT shareholders a big equity bump with only a small increase in dilution for Dell.
- If and when the DVMT deal wraps up, there’s going to be some very interesting dynamics around Dell’s float. Dell is going to be a very large company with a very tightly controlled stock given the high levels of insider ownership. I would guess it’s getting added to the indices at some point in the near future, which should create a natural base of buyers over time.
- I do think the Dell equity would be interesting at the levels the market is valuing it at. While the market will undoubtedly assign a conglomerate discount to all of Dell’s equity stakes, I highly doubt Dell ever pays taxes on them; I would guess they eventually spin the stakes out tax free to shareholders. I would much rather by aligned with Dell at the Dell level and buy into those stakes at a discount than buy the controlled equities directly in the public market and risk some shenanigans from Dell at that level. Combine that “unwarranted” discount of the equity stake with a highly levered and cash generative core Dell, and I could see the stock appreciating significantly once it starts to trade and people start to see the underlying economics of the business.
- The WSJ is reporting Carl Icahn is “unlikely” to push for a better deal at DVMT after making $200m on DVMT / VMW (disclosure: short a small amount). I find it tough to believe a guy who has made his fortune in large part on negotiating and activism is going to turn a situation he’s involved in down just because he’s already made a quick buck, but who knows? Maybe he just doesn’t want to do the heavy lifting and is hoping someone else will step in here. All I know is this is a situation ripe for activism, and whether it’s Icahn or someone else, I’d be surprised if someone didn’t at least try to unlock some additional value here.