Dell + EMC = VMware Unchained?

Following a recent report of a potential merger between Dell Inc. and EMC, Credit Suisse analyst Philip Winslow released a report outlining Credit Suisse’s take on how things will play out between Dell, EMC and VMware.

Winslow believes that if EMC’s stake in VMware is spun out, the company could soon become a takeover target for larger IT names.

The Scenario

Winslow believes that a VMware spinout prior to a Dell/EMC merger makes sense in a lot of ways. First, the debt burden associated with acquiring VMware along with the rest of EMC would likely be too much for Dell to manage. Second, the sale of EMC’s core business to Dell could result in a higher valuation for EMC, which is one of the main points of Elliott Management’s call to break up EMC.

Related Link: Update: Dell In Talks With Banks Regarding Financing For All-Cash EMC Bid --Reuters

What Would It Mean For VMware?

For VMware, this scenario would mean “the gloves would come off” for the company in terms of aggressively advancing its storage portfolio and competing directly against EMC in the broader storage market. “Although potentially providing less near-term upside for VMware shareholders as compared to the spin-in option […] we believe any near-term pressure on VMware’s stock from the release of EMC’s 80 percent stake […] would be short-lived,” Winslow explained.

Buyout Target

In addition to the freedom to take a more aggressive competitive approach, Winslow believes that an independent VMware would immediately become a buyout target for larger tech companies. He mentioned Oracle Corporation ORCL, International Business Machines Corp. IBM, Hewlett-Packard Company HPQ and Cisco Systems, Inc. CSCO as potential buyers.

Credit Suisse currently has an Outperform rating on VMware and a $130 target for the stock.

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