Dell Is Buying EMC in a Blockbuster Tech Deal



Merger arbitrage

To perform merger arbitrage, an investor generally buys the stock of the company being acquired, short-sells the relevant ratio of the acquirer’s stock, if applicable, and waits for the deal to close. When the merger is complete, the investor exchanges the stock of the company being acquired for the amount agreed upon in the deal.

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The biggest tech deal of the year so far

After being pushed by major shareholder Elliott Management to either spin off its holding of VMware (VMW) or sell itself, EMC delivered and negotiated a sale to Dell, which went private in 2013. Dell is paying a combination of cash ($24.05 a share) and approximately 0.111 shares of tracking stock in VMware, which is controlled by EMC. At the headline amount of approximately $33.15 a share, that works out to be an approximate 28% premium to EMC’s closing price on October 7 before reports of the deal were leaked to the press.

Jesse Cohn, an Elliott portfolio manager who heads its U.S. activist efforts, said in an interview, “EMC’s board and management really delivered for shareholders. This is all you can ask for. They were relentless and creative in getting to the best possible answer for the company’s owners.”

Basics of the arbitrage spread

The deal is subject to customary closing conditions and regulatory approvals. According to the press release, the deal is expected to close in the first half of 2016. If you assume a closing date of June 30, 2016, then the spread is trading at 21.3% annualized. This is a gargantuan spread reflecting the uncertainty of the value of the tracking stock. This deal will be fundamentally different from a typical risk arbitrage position in that when the deal closes, investors will not have a flat position but will still have a pairs trade of a long position in VMware tracking stock and a short position in VMware common stock. VMware tracking stock does not have a vote or actual ownership of anything, so it will trade at a discount to the common stock.

Merger arbitrage resources

Other important merger spreads include the deal between Baker Hughes (BHI) and Halliburton (HAL) and the merger between Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI). For a primer on risk arbitrage investing, read “Merger Arbitrage Must-Knows: A Key Guide for Investors.”

Investors who are interested in trading in the tech sector can look at the iShares Global Technology ETF (IXN).


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