EMC Corporation and VMware (VMW)-Arbitrage Chance Missed?

[howdydudey]

I am a noob, so I was wondering if any more experienced posters could clear this up for me.

EMC Corp (EMC) is an IT company
Market Cap: $43.02 bln.
Revenue: 11.1 bln
Income 1.2 bln.
Net tangible assets: 3.3 bln.
P/E: 33

VMWare(VMW) is a virtualization software company. Recent IPO
Market Cap: $32.10 bln.
Revenue: 700 mln
Income 70 mln.
Net tangible assets: -830 mln.
P/E: 222

EMC owns 87% of VMW so its stake is worth 28.5 bln.

I would say there is a pricing disconnect between the companies.

Bear Stearns and Citigroup upgraded the stock this morning. Citi basically stated that it EMC will go up because it is undervalued when compared to its large ownership of VMW.

I think it is the opposite. I think EMC’s low price indicates that VMW is overpriced.

There is an example in Intelligent Investor that is strikingly similar to this, with the end result of the overvalued spinning off crashing in value.

So would this have been an arbitrage opportunity if it was caught sooner?

Anyone that has more experience have any thoughts?

Also, considering the stock has a 32 bln market share, can a 200+ P/E ever be justifiable?

[PRE]

As an equity analyst, I'd say you've stumbled upon something I stumbled upon last month. Nice analysis sir.

Edit: I love how the sell-side is always so late in finding this stuff.

[ahnuld]

damn, this woulda been useful to know. When was this from? Looks like a definite buy EMC, short VMware to me.

[ahnuld]

is this still profitable? Doesnt seem like enough of a move came about yesterday to undo the possibilities of arbitrage. The 3m/palm situation took a few months before the arbitrage opportunity was priced out.

[NajdorfDefense]

This is not an arbitrage. If you short VMWare and Long EMC, VMWare can go up more than EMC. EMC can go down more than VM. Both can be flat and you owe the borrow on VMWare.


I agree, eventually it will fix itself, but it always takes more time than you think. You will often get short-squeezed out on names like VM. Remember, your broker can FORCE you to buyback at ANY time w/o needing to ask you.

[Phone Booth]

[ QUOTE ]
I am a noob, so I was wondering if any more experienced posters could clear this up for me.

EMC Corp (EMC) is an IT company
Market Cap: $43.02 bln.
Revenue: 11.1 bln
Income 1.2 bln.
Net tangible assets: 3.3 bln.
P/E: 33

VMWare(VMW) is a virtualization software company. Recent IPO
Market Cap: $32.10 bln.
Revenue: 700 mln
Income 70 mln.
Net tangible assets: -830 mln.
P/E: 222

EMC owns 87% of VMW so its stake is worth 28.5 bln.

I would say there is a pricing disconnect between the companies.

Bear Stearns and Citigroup upgraded the stock this morning. Citi basically stated that it EMC will go up because it is undervalued when compared to its large ownership of VMW.

I think it is the opposite. I think EMC’s low price indicates that VMW is overpriced.

There is an example in Intelligent Investor that is strikingly similar to this, with the end result of the overvalued spinning off crashing in value.

So would this have been an arbitrage opportunity if it was caught sooner?

Anyone that has more experience have any thoughts?

Also, considering the stock has a 32 bln market share, can a 200+ P/E ever be justifiable?

[/ QUOTE ]

Well I've been long EMC since the day VMW went public. I also thought at the time VMW may be a bit rich at 50+. I'm not entirely sure at which point you would've been able to play this for arbitrage profit - the core EMC (EMC - VMW) is still trading at a significant discount, so that profit isn't here yet, unless you're talking the past week or so when the discount was much larger than even before (the flipside being that if you entered this trade earlier, you would've lost a lot of money). I wouldn't worry about missing an arbitrage trade where you would've been shorting VMW (which is up close to 200% from its IPO price and up 50%+ since the IPO day)

In short, if there ever was a significant arbitrage opp, there still is and most of the increase in EMC lately is catching up with an earlier, larger increase in VMW. At the same time, I don't think VMW is that significantly overvalued - ask any IT manager of a big company about VMWare.

The real point in buying EMC may come from the fact that your share in VMW through EMC is more valuable than your share in VMW because EMC controls VMW and may be able to sell their own products through the VMWare pipeline. Virtualization itself creates a lot of need for storage and storage management.