U.S. stocks are slightly lower early on Wednesday afternoon, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) down 0.66% and 0.38%, respectively, at 12:15 p.m. EDT.
This is a historic week for corporate deal-making. Yesterday, AB InBev announced it will acquire SABMiller plc in a transaction that values its rival at $115 billion (inclusive of net debt). This the largest food and beverages M&A transaction of all time, creating a "megabrewer" with an estimated global market share after expected divestments in excess of 28% (the nearest competitor, Heineken NV, has roughly 9%).
That news has overshadowed the previous day's monster deal announcement: Dell's proposed purchase of EMC Corporation. Dell, backed by its owners Michael Dell, his family office MSD Partners, and investment company Silver Lake Partners, has put together a complex cash-and-share offer with an indicative value of $33.15 per EMC share, for a total transaction value of $67 billion -- the largest technology M&A transaction of all time.
Cash-and-share offer? Dell was taken private in 2013, so whose shares are they offering?
That's where the complexity lies: Dell will pay EMC shareholders $24.05 per share in cash and 0.111 share of a new tracking stock linked to EMC's stake in VMware. EMC currently owns 81% of the virtualization software specialist, a stake that represents nearly half of EMC's market value.
In other words, EMC shareholders will receive cash and retain an economic interest in EMC's most valuable asset. The tracking shares are not a voting interest, however -- Dell will control VMware,despite the fact that its economic interest will be reduced to 28%.
Elliott Management, the activist hedge fund that owns 2.2% of EMC's shares, has given the deal its benediction, suggesting it will retain the tracking shares it receives. ("Elliott is pleased to participate in VMware's ongoing upside through the tracking stock, which will benefit from both meaningful synergies as part of Dell's organization as well as far greater liquidity than VMware shares have today.")
From a business standpoint, the deal is certainly defensible. Dell extends its range of corporate offerings and adds scale (with aggregate revenues in excess of $80 billion, the Dell-EMC combination would be in the same league as IBM).
From a valuation perspective, you have an exacting, value-oriented shareholder that "strongly supports" the transaction. Everyone walks away happy.
The market doesn't appear to have much confidence in the deal. Given the deal terms, the comparison of EMC's current share price with that of VMware yields the market's estimate of the probability of the deal being completed. That figure is less than 40%, according to data from Bloomberg.
This columnist will go out on a limb: Just as the market underestimated AB InBev's ambition to secure a deal with SABMiller, I think it is underestimating Dell's determination. After all, there aren't many people who can say they came out victorious after going mano a mano with Carl Icahn (who opposed Dell going private in 2013).