VMware's New Class V Stock Examined By Bernstein

VMware, Inc. (NYSE: VMW) shares are likely to continue to be under pressure at least until the deal between Dell and EMC Corporation (NYSE: EMC) potentially closes, Bernstein’s Mark L. Moerdler said in a report. He maintained a Market-Perform rating on the company, with a price target of $67.

Discount Assigned For Disparity

Dell has plans of issuing 223 million shares of Class V common stock designed to track 65 percent of EMC's investment in VMware, which represents 53 percent of outstanding VMware stock. Analyst Mark Moerdler pointed out, however, that the Class V shareholders would not have any votes in VMware’s corporate matters or board elections.

Related Link: Morgan Stanley Resumes Coverage On VMware At Overweight

“This disparity in shareholders rights clauses between Class V shares and VMW Class A common stock likely justifies a substantial discount ascribed to Class V shares,” Moerdler wrote.

While management indicated that Class V shares would likely benchmark to Class A shares, the market seems to have assigned a discount of 25-35 percent, depending on EMC's price when the merger is finally approved.

VMware’s shrinking core is impacting revenue generation, since this has not been sufficiently offset by newer growth offerings. “The Class V VMware tracking stock, we believe, will absorb some of the upside lift generated by any positive VMware news and creates what be a considerable arbitrage trade,” the analyst commented.

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