MORGAN STANLEY: A Dell and VMware merger is a 'worst case scenario' for shareholders (VMW)

Michael Dell

Analysts at Morgan Stanley warned in a note Monday that a reverse merger between Dell and VMware is a "worst case scenario" for VMware shareholders.
Analysts said a merger could devalue VMware by as much as $28 billion. This also leads them to believe that a merger is unlikely, according to the note.
Dell is considering a reverse merger with the publicly-traded company, as a means of going public itself. Dell is also looking into an IPO, or keeping things as they are.

Dell Technologies is considering mixing up its ownership structure, and analysts at Morgan Stanley are not going along for the ride.

In a note published on Monday, Morgan Stanley analysts Keith Weiss and Sanjit Singh warned investors against one of the most interesting options on the table, in which Dell Technologies would do a "reverse merger" with its subsidiary company VMware.

Analysts called a merger the "worst case scenario" for VMware shareholders.

VMware is traded publicly, and a merger would take Dell public without putting the company through an initial public offering. Dell currently owns 82% of VMware stock, and 97% of its voting interest, thanks to the 2015 Dell/EMC merger.

A reverse merger would have tax benefits for Dell and give the company access to VMware's cash, according to the report, but ultimately it would have a negative impact on VMware's shareholders.

Analysts at Morgan Stanley project that a combined company would devalue VMware by $28 billion — considerably more than the $500 million-600 million annual taxes Dell will face if it continues to operate under its existing structure.

Already VMware stock, which traded at an all-time high of $150 in late January, has suffered. Shares currently cost around $117, which Morgan Stanley expects would "quickly" return toward its $143 price target if "the risk of a reverse merger diminishes."

However, analysts also conclude that it's the least likely of the three strategic options Dell is pursuing.

The company is also looking into doing its own IPO, as well as looking into whether staying private is actually the best option.

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