Why Isn't EMC Stock Higher...And Why Is VMware Radio Silent?

It’s been more than a month since EMC announced that it will be acquired by Dell for about $33.13/share. However, EMC shares continue to trade about 24 percent below the proposed buyout price.

In a new report, A.B. Bernstein analyst A.M. Sacconaghi, Jr. took a closer look at what’s going on with EMC.

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VMware Pullback

The majority of EMC’s sluggish price action is likely due to the weakness in VMware’s stock since the announcement of the deal. More than 27 percent of the proposed $33.13/share EMC valuation when the Dell deal was announced came from the 0.11 shares of VMware tracking stock included in the deal for every share of EMC stock.

However, VMware shares are down more than 18 percent since the deal was announced on fears surrounding Dell’s influence on the company moving forward. Under the terms of the proposal, Dell would own less than 30 percent of VMware, but would control 97 percent of voting power.

EMC Still Undervalued

Even with the weakness in VMware factored in, EMC remains undervalued at current levels. According to Sacconaghi, there are two reasons for this lag. First, tracking stocks typically trade to a discount to public shares, which could be responsible for a 20 percent lag in VMware valuation. Second, Sacconaghi sees a 13 percent “deal discount,” reflecting the opportunity cost of holding EMC shares and concerns that the deal might not close.

Buying Opportunity

Sacconaghi is convinced that the deal makes sense and will go through. Bernstein has an Outperform rating and a $30 target for EMC and a Market-Perform rating and $65 target for VMware.

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