Why Shares of VMware Tumbled Today

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What happened

Shares of VMware (NYSE: VMW) slumped on Monday after reports that privately held parent company Dell was considering the possibility of selling itself to VMware. This comes a few days after initial reports that Dell was exploring strategic options, including a possible initial public offering. Shares of VMware were down 16.7% at market close, while shares of Dell Technologies (NYSE: DVMT), which tracks Dell's interest in VMware, were down 9.6%.

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So what

Dell owns 80% of VMware, the result of its 2016 acquisition of EMC. While various alternatives are on the table, including Dell buying the rest of VMware and Dell selling shares to the public, the reverse-merger option of VMware acquiring Dell is now reportedly being considered.

Dell has nearly $50 billion of debt from its leveraged buyout in 2013 and its acquisition of EMC. The option of being acquired by VMware would allow the company to be publicly traded without going through the initial public offering process. Such a transaction would also allow the private equity owners of Dell to cash out.

Dell's board of directors plans to discuss options at a meeting in February. Nothing has been decided at this point.

Now what

Monday's slump more than erases VMware's Friday gains, which were driven by initial reports that Dell was considering strategic options. The prospect of VMware acquiring Dell could be sparking fears of dilution, since this type of deal would involve VMware issuing shares to Dell's owners. It would also put VMware into the PC and server hardware business.

Investors should learn more in the coming weeks, after Dell's board meets to discuss possible courses of action.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.

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