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Iceberg, dead ahead! VMware investors jump ship

The jewel in the Federation's crown appears to be drifting slowly towards the seabed, as Dell and EMC announce cloud plans

“Abandon ship, abandon ship” is the cry from VMware investors. Their once unsinkable vessel has been blindsided by a big Dell-shaped iceberg and is now taking on water. The captains are trying to keep everyone calm, grabbing their violins and playing a beautiful rendition of Autumn.

“God himself could not sink this ship,” Mr. Gelsinger assures his investors. “It’s unsinkable.”

“She's made of iron, sir,” replies an analyst. “I assure you, she can... and she will. It is a mathematical certainty.”

Titanic references aside, VMware has found itself in serious trouble, through no fault of its own one might add. The EMC-Dell mega-deal caused a great deal of concern amongst investors, but it was manageable. Now, as details begin to emerge, it is all becoming a bit too much for investors to bear.

The announcement that all cloud assets will be bundled under Virtustream as a jointly-owned hybrid cloud company was the berg that breached the boat’s bow.

The various CEOs promised investors that the new hybrid cloud entity would become a key player in the cloud space, up there with Amazon and Microsoft, which sounds great in theory - but in order to make it happen, significant investment will be required. VMware CFO Jonathan Chadwick estimated that Virtustream will see an operating loss of between $200m and $300m in its first year. Half of any investment will come from VMware and that, in turn, will put a squeeze on VMware’s operating margin.

From an investor’s point of view, VMware is footing the bill for EMC and Dell’s elaborate plans of world domination and getting very little in return. And just like that, the share price crashed by 20%. Iceberg, dead ahead.

EMC boss Joe Tucci conceded that the market’s reaction was disappointing but said he believed that it would help VMware in the long run.

“I don’t think we’ve done as good a job as we need to do in explaining this combination,” he told analysts. “What I think didn’t come across was that putting these together will actually save money and actually put more profit on the VMware bottom line.”

“Every fibre in my body believes this is good both for EMC and VMware shareholders and other stakeholders as well.”

He was also keen to stress that Dell played no role in the decision to reorganise cloud operations.

“I can absolutely guarantee everyone on this call that Dell had nothing to do with this transaction which was driven primarily out of VMware with us,” he said.

EMC’s Federation structure was confusing prior to the deal. Now, it is bewildering beyond belief. Just to recap, the Federation will consist of EMC – aka Dell - owning 80% of VMware and 50% of Virtustream, with the other 50% being owned by VMware; 65% of Pivotal, with 10% owned by GE and 25% owned by Vmware; 83% of VCE, with 35% owned by Cisco; and 100% of RSA. Or something like that.

Given that the circus is town, EMC’s quarterly results are almost a footnote. Profits for the quarter essentially met expectations at 43 cents a share, while revenue totaled $6.08bn, a 1% year over year increase, but below the $6.17bn that analysts had expected.

EMC shares are currently trading at $25.87, while VMware trades at $55.42. 

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