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Jan 29, 2018

S3 Analytics: Dell/VMware Reverse Merger Rumor Makes Shorts $468 million

Michael Dell and Silver Lake Management LLC took Dell Technologies Inc. private through a leveraged buyout in 2013 in order to revamp the company without quarterly shareholder and analyst scrutiny. In 2016, Dell bought EMC Corp for $67 million, which included an 80% stake in VMware Inc. Today, Dell Technologies is considering a reverse merger with VMware Inc. in order to once again become a publicly traded company.

VMware Inc. is the second largest short in the Systems Software Sector, trailing only Microsoft Corp. Today’s 13% price drop, based on the reverse merger news, generated $452 million on mark-to-market profits for the $3.4 billion of short exposure in the stock.

While the overall market punished VMware’s stock price on the potential reverse merger news, Deutsche Bank re-issued its buy rating and increased their target price by 20% to $175/share. We saw a mixture of short selling and buys to cover today. With today’s price decrease and slight net short covering, VMW short exposure should decline slightly over the next few days.

After hitting a year-to-date high of $150/share on Friday, January 26th, shorts were down $573 million in mark-to-market losses for 2018. Today’s price drop made back most of January’s losses and may create an attractive exit point for shorts that are fearful of any new positive news pushing VMW back near its yearly highs. With over 22 million VMW shares shorted, if there is run for the exits, VMW stock price may quickly rebound with the help of a slew of buy to covers as shorts try and realize their recent mark-to-market gains.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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