Investors acquire large part of VMware: front running Cisco acquisition?

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Rumors of a possible EMC/VMW acquisition by Cisco has resurfaced. has discovered some circumstantial evidence which combined could mean that something huge is about to go down.

Monday’s SEC filings shows that Cisco posted a prospectus on raising $4 billion in senior bonds. The book building is run by all the major investment banks and is closing on February 17.
Cisco must be really confident for such a major issuance in these market conditions, but Standard & Poors is giving the senior unsecured notes an A+ rating with a stable outlook.
Cisco will use $500 million of the $4 billion to repay short term debt.  When combined with sizeable cash holdings, this leaves them with with $4.7 billion in cash at the US parent company. According to CNET that amount excluded cash holdings at subsidiaries overseas.

That is not enough for a full takeover as the market cap of EMC is around $25 billion and VMware about $10.5 billion, but a possible stock swap with a cash settlement sprinkled on top could certainly interest EMC investors (Cisco currently hold 1.7% of the total outstanding stock).

VMware holds about $1.8 billion in cash, so a possible deal could be $6.5 billion in cash and $6-7 billion in Cisco stock (Cisco would have to pay at least a 20% premium here).

EMC holds about $5.8 billion in cash and $1 billion in short term investments,for a combined $8.2 billion (with 84% VMware ownership) in cash equivalent. A possible deal could then be $13 billion in cash and $15-17 billion in Cisco stocks.

Another piece of the (possible) puzzle is some interesting moves in VMware stock holders lately.

When a company acquire above 5% of the outstanding shares in a public company, US laws require them to file a SEC 13G form, reporting their interest to the stock market.
It must also be clearly understood that the party acquiring the stake in the company is only a passive investor, and does not intend to exert control.

The 13G must be filed within 10 days after acquiring the stocks.
On February 10 UBS filed on behalf of several accounts.
These are usually anonymous investment accounts so we do not know who is hiding behind UBS, but surely someone thinks VMware is a good investment.

The holdings made public are:

Name Type Number of shares Percentage of common stock
UBS AG BK, HC 14,433,983 shares 16,1%
UBS Americas Inc. HC 6,178,882 shares 6.9%
UBS Global Asset mgt IA 5,465,362 shares 6.1%

This is a total of 26,078,227 shares, representing 6.7% of the outstanding shares.

The reason for the different percentages is due to EMC chose to split the VMW shares in two stock classes when it took VMware public in 2007.
The shares have different voting rights and are divided in class A and B common shares.
Even though just 90,448,000 shares are listed on NYSE, there are a total of 389,602,066 outstanding.
EMC still owns 327,000,000 shares, representing 83,4% of the company.
This means UBS clients are currently controlling about a quarter of the NYSE listed shares.

VMware had a profit of $290 million on revenues of $1.9 billion in 2008.
With a valuation of $10.5 billion that represents a P/E in the low thirties, a very high number.
If we look at the pure financials and EMC’s controlling stake, VMware is simply not worth this even with a projected 50% growth rate.
It is still far better than the P/E the company had when it was valued at $45 billion in October 2007.

But for Cisco, both VMware and EMC would have a significant strategic value.
With cloud computing portrayed as the future of computing, a merger with EMC would be a perfect match.

Cisco are already partnering with Dell, EMC and VMware, they would be able to provide a single vendor solution of the entire stack with an OEM deal with Dell.

Cisco have already very thigh integration between Vframe and VMware vCenter. They could provide the 10,000 feet management and automation platform, with a unified I/O fabric with some distributed storage at the back end from a single vendor.
So maybe the upcoming Cisco blade system codename California is more than just the result of a business partnership.

A Cisco/EMC/VMware entity would offer a very compelling cloud computing platform, even though they don’t control an API like Amazon web services, Google Apps or Microsoft Azure.