VMware and EMC shock everyone by launching a new company while Dell tries to buy them

Pat Gelsinger VMwareVMwareVMware CEO Pat Gelsinger

VMware reported its third-quarter results on Tuesday and slipped in an announcement that surprised everyone.

VMware and its parent company EMC are launching a new spin-out company, called Virtustream, where both VMware and EMC own a 50/50 stake.

This is a cloud computing company that will compete with Amazon, Google and Microsoft, using EMC hardware and VMware software at its core, including cloud management tech from a company called Virtustream that EMC bought last spring for $US1.2 billion.

The spin-out at this juncture is really weird because just last week, Dell announced that it was acquiring EMC for a record breaking $US67 billion, including EMC’s majority stake in VMware.

While the Dell/EMC acquisition won’t be complete for months, all of this new company will wind up under Dell’s umbrella, once it is. So to announce a spin-off at this point is surprising.

Maybe the real point is to prove to VMware shareholders that Dell really will be hands-off with VMware. Dell even wrote a blog post Monday pledging not to muck up VMware.

Meanwhile, VMware’s stock took a nose dive after Dell announced the acquisition.

That’s a problem because Dell’s agreement to buy EMC includes “tracking” stock to EMC shareholders to represent their VMware ownership. Dell was using the value of VMware shares to help boost his offer for EMC from about $US24/share to about $US30/share.

Investors still aren’t thrilled with VMware. The stock has dropped 5% in after-hours trading.

As expected, VMware also reported a solid third quarter, beating on profits and revenue, meeting its guidance for growth. (VMware pre-announced its expected earnings last week when Dell and EMC announced the planned acquisition.)

It reported Q3 EPS of $US1.02 and revenue of $US1.67 billion (up almost 10% Y/Y).

Its guidance was for high-single to low-double digit 2016 revenue growth, with the Street looking for 10.9%. It’s Q4 EPS guidance was $US1.23-$US1.27, where analysts were expecting $US1.23.

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