Summary of Financial Analyses
The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion dated October 11, 2015. The following summary is not a complete description of Morgan Stanley’s opinion or the financial analyses performed and factors considered by Morgan Stanley in connection with rendering its opinion, nor does the order of analyses described represent the relative importance or weight given to those analyses. In connection with arriving at its opinion, Morgan Stanley considered all of its analyses as a whole and did not attribute any particular weight to any
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analysis described below. Considering any portion of these analyses and factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s opinion. The various analyses summarized below were based on the closing price of $25.96 per EMC common share as of October 7, 2015, the last trading date prior to press reports that Denali and EMC were engaged in discussions regarding a possible transaction. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Furthermore, mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using the data referred to below.
In performing the financial analyses summarized below and in arriving at its opinion, Morgan Stanley utilized and relied upon certain non-public financial projections for EMC on a consolidated, non-GAAP basis (“Consolidated EMC”) and for VMware as provided by the management of EMC and referred to below (the “July Case”). Morgan Stanley, based on management guidance, adjusted the July Case with respect to Consolidated EMC, as presented to the Board of Directors, to reflect an incremental interest expense on $2.5 billion of incremental EMC debt from 2018 onwards (the “Adjusted July Case”). In certain instances, the projections were extrapolated for future periods not accounted for in the projections provided by the management of EMC. Additionally, Morgan Stanley prepared financial projections using publicly available consensus estimates for Consolidated EMC and for VMware through 2017 and extrapolating for future years (the “Street Forecast”). Extrapolation in the Street Forecast assumed a constant dollar growth in revenue and operating income contribution based on publicly available consensus estimates for 2016 and 2017. Morgan Stanley also utilized financial projections for EMC that deconsolidated VMware from Consolidated EMC by subtracting the VMware financial projections from the Consolidated EMC financial projections to derive financial projections that excluded any contribution from VMware (“EMC Core”). For further information regarding these financial projections, see the section entitled “—Certain Financial Projections Related to EMC.”
Morgan Stanley also calculated the equity value of Consolidated EMC by multiplying EMC’s fully diluted shares outstanding times (i) EMC’s trading price as of October 7, 2015, the last trading date prior to press reports that Denali and EMC were engaged in discussions regarding a possible transaction, and (ii) the implied merger consideration of $33.15 per share. For purposes of this analysis, Morgan Stanley assumed, based on management guidance, that 1.94 billion basic shares, 29.9 million options at a weighted average exercise price of $12.86 and 56 million restricted or performance stock units were outstanding.
| EMC Consolidated | ||||
| Price as of October 7, 2015 |
$ | 25.96 | ||
| Fully Diluted Shares Outstanding (million) |
2,010 | |||
| Equity Value (million) |
$ | 52,179 | ||
| Implied Merger Consideration |
$ | 33.15 | ||
| Fully Diluted Shares Outstanding (million) |
2,013 | |||
| Equity Value (million) |
66,736 | |||
Analyses Related to EMC and VMware
Regression Framework
In order to evaluate the relationship between trading multiples and forecasted growth, Morgan Stanley compared certain financial information of EMC with publicly available consensus earnings estimates and public market multiples for other companies that share similar business characteristics with EMC. The companies used in this comparison included:
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Comparable Peer Set 1
| 2016 Revenue Growth |
2016 AV/EBITDA Multiples |
2016 P/E Multiples |
||||||||||
| Cisco Systems, Inc. |
3.6 | % | 6.4x | 11.8x | ||||||||
| Hewlett-Packard Company |
(0.6 | %) | 4.8x | 7.5x | ||||||||
| International Business Machines Corporation |
(0.9 | %) | 7.8x | 9.3x | ||||||||
| Microsoft Corporation |
5.4 | % | 9.1x | 15.2x | ||||||||
| NetApp, Inc. |
1.7 | % | 5.4x | 12.0x | ||||||||
| Oracle Corporation |
2.3 | % | 8.6x | 13.7x | ||||||||
| SAP SE |
5.1 | % | 10.4x | 15.2x | ||||||||
| Symantec Corporation |
3.1 | % | 5.8x | 10.6x | ||||||||
| VMware, Inc. |
11.3 | % | 11.8x | 18.0x | ||||||||
Comparable Peer Set 2
| 2016 Revenue Growth |
2016 AV/EBITDA Multiples |
2016 P/FCF Multiples |
||||||||||
| CA, Inc. |
2.0 | % | 7.2x | 13.3x | ||||||||
| Citrix Systems, Inc. |
5.1 | % | 11.1x | 15.9x | ||||||||
| Red Hat, Inc. |
14.8 | % | 21.8x | 21.1x | ||||||||
| salesforce.com, inc. |
20.5 | % | 31.4x | 36.3x | ||||||||
For purposes of this analysis, Morgan Stanley performed a regression analysis that evaluated:
Revenue Growth to Key Valuation Metric Regression Framework
the ratio of (i) the stock price to (A) earnings per share (“EPS”) (adjusted for dilution from equity awards) for Comparable Peer Set 1 or (B) projected free cash flow per share (adjusted for dilution from equity awards) for Comparable Peer Set 2, for calendar year 2016, to (ii) the estimated annual growth rate in revenue for such companies during the period from calendar year 2015 through calendar year 2016, in each case as reflected by publicly available consensus equity research analyst estimates. Morgan Stanley used different analyses for Comparable Peer Set 1 and Comparable Peer Set 2 because, in Morgan Stanley’s judgment, the companies included in Comparable Peer Set 1 trade on price-to-earnings (“P/E”) multiples, while the companies included in Comparable Peer Set 2 trade on free cash flow multiples. This analysis is referred to as the “Revenue Growth to Key Valuation Metric Regression Framework” and yielded an exponential regression line with an R-squared (a statistical measure of how close the data are to the fitted regression line) value of 88%; and
Revenue Growth to EBITDA Regression Framework
the ratio of (i) the aggregate value, which is defined as fully-diluted market capitalization (calculated using the treasury stock method) plus total debt, less cash and cash equivalents (“Aggregate Value”), to estimated earnings before interest, taxes, depreciation and amortization and stock-based compensation expense (“EBITDA”) for calendar year 2016, to (ii) the estimated annual growth rate in revenue for such companies during the period from calendar year 2015 through calendar year 2016, in each case as reflected by publicly available consensus equity research analyst estimates. This analysis is referred to as the “Revenue Growth to EBITDA Regression Analysis” and yielded an exponential regression line with an R-squared value of 86%.
No company utilized in the regression framework is identical to EMC. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of EMC. These include, among other things, the impact of competition on the businesses of EMC and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of EMC or the industry, or in the financial markets in general.
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Implied Trading Analysis
Consolidated EMC
Morgan Stanley performed an analysis in which it calculated the trading value per EMC common share, using one-year forward price-to-earnings (“P/E”) multiples for Consolidated EMC and applying such analysis to the Street Forecast and the Adjusted July Case. P/E multiples were derived using the Revenue Growth to Key Valuation Metric Regression Framework and estimated 2016 growth rates and ranged from 12.2x – 13.2x for the Consolidated EMC Street Forecast and 11.8x – 12.8x for the Consolidated EMC Adjusted July Case. These multiple ranges were selected based on a (0.5)x / 0.5x variance from the applicable point estimates provided in the Revenue Growth to Key Valuation Metric Regression Framework. These calculations resulted in the following ranges:
| Range (1) | ||||
| Street Forecast |
$ | 25.00 – $27.00 | ||
| Adjusted July Case |
$ | 24.00 – $26.00 | ||
| (1) | Per share amounts rounded to the nearest 50 cents. |
EMC Core plus VMware
Morgan Stanley performed a separate analysis in which it calculated the trading value per EMC common share using EMC Core on a stand-alone basis plus Consolidated EMC’s 81% stake in VMware (“EMC Core plus VMware”). Morgan Stanley performed the analysis calculating trading value per EMC Core and VMware on a per Consolidated EMC common share basis, using P/E multiples and applying such analysis to the EMC Core and VMware Street Forecast and the EMC Core and VMware Adjusted July Case. P/E multiples were derived using the Revenue Growth to Key Valuation Metric Regression Framework and estimated 2016 growth rates and, for the Street Forecast, ranged from 10.5x – 11.5x for EMC Core and 17.8x – 18.8x for VMware, and for the Adjusted July Case, ranged from 10.3x – 11.3x for EMC Core and 16.4x – 17.4x for VMware. These multiple ranges were selected based on a (0.5)x / 0.5x variance from the applicable point estimates provided in the Revenue Growth to Key Valuation Metric Regression Framework. These calculations resulted in the following ranges:
| Range (1) | ||||
| Street Forecast |
$ | 27.50 – $29.50 | ||
| Adjusted July Case |
$ | 26.00 – $28.00 | ||
| (1) | Per share amounts rounded to the nearest 50 cents. |
Discounted Future Equity Value Analysis
Morgan Stanley performed a discounted equity value analysis to calculate ranges of implied equity values per common share of EMC as of October 9, 2015, which is designed to provide insight into the estimated future implied value of a company’s equity price per share as a function of its estimated future EPS and P/E ratios. The resulting values are subsequently discounted by an assumed cost of equity to arrive at a range of present values for the company’s price per share. For purposes of this analysis, Morgan Stanley did not take into account payments of any dividends by EMC.
Consolidated EMC
Morgan Stanley performed an analysis of the present value per EMC common share of implied future trading prices by applying P/E ratios to the estimated one-year forward EPS of Consolidated EMC from year 2017 and year 2019 (i.e., for the twelve-month periods ending December 31, 2017 and December 31, 2019, respectively). All P/E ratios were derived from the Revenue Growth to Key Valuation Metric Regression
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Framework and revenue growth rates for the applicable forward year. Morgan Stanley applied such analysis to both the Street Forecast and the Adjusted July Case. For the Street Forecast, Morgan Stanley used a P/E ratio of 13.2x for year 2017 and 12.8x for year 2019. For the Adjusted July Case, Morgan Stanley used a P/E ratio of 13.7x for year 2017 and 15.0x for year 2019. Morgan Stanley then calculated what the current price of EMC common shares would be if this future share price was discounted back to October 9, 2015, using a discount rate range of 8.3 – 10.3%. Such range of discount rates, reflecting estimates of Consolidated EMC’s cost of equity, was derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to its cost of equity analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.19 based on the U.S. local predicted beta provided by Barra, an estimated risk-free rate of 2.1% based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015 and an equity risk premium of 6.0% estimated by Morgan Stanley using its professional judgment and experience.
| 2017 Range (1) | 2019 Range (1) | |||||||
| Street Forecast |
$ | 25.00 – $26.00 | $ | 23.00 – $24.50 | ||||
| Adjusted July Case |
$ | 28.50 – $29.50 | $ | 30.50 – $33.00 | ||||
| (1) | Per share amounts rounded to the nearest 50 cents. |
EMC Core plus VMware
Morgan Stanley performed a separate analysis of the present value per EMC common share of implied future trading prices by applying P/E ratios to estimated one-year forward EPS of EMC Core plus VMware for year 2017 and year 2019. Morgan Stanley applied such analysis to both the Street Forecast and the Adjusted July Case. For the Street Forecast, Morgan Stanley used a P/E ratio of 12.0x for EMC Core and 15.8x for VMware for year 2017, and 11.8x for EMC Core and 14.5x for VMware for year 2019. For the Adjusted July Case, Morgan Stanley used a P/E ratio of 12.7x for EMC Core and 15.9x for VMware for year 2017, and 13.9x for EMC Core and 16.9x for VMware for year 2019. All P/E ratios were derived from the Revenue Growth to Key Valuation Metric Regression Framework and revenue growth rates for the applicable forward year. Morgan Stanley then calculated what the current price of EMC common shares would be if the future share prices of EMC Core and VMware were discounted back to October 9, 2015, using discount rate ranges of 8.3 – 10.3% for EMC Core and 8.0 – 10.0% for VMware. Such ranges of discount rates, reflecting estimates of EMC Core’s and VMware’s respective costs of equity, were derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to each company’s cost of equity analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.19 for EMC Core and 1.15 for VMware, each based on the U.S. local predicted beta provided by Barra; an estimated risk-free rate of 2.1% for both EMC Core and VMware, based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015; and an equity risk premium of 6.0% for both EMC Core and VMware, each estimated by Morgan Stanley using its professional judgment and experience.
| 2017 Range (1) | 2019 Range (1) | |||||||
| Street Forecast |
$ | 26.00 – $27.00 | $ | 23.50 – $25.50 | ||||
| Adjusted July Case |
$ | 29.00 – $30.00 | $ | 31.00 – $33.50 | ||||
| (1) | Per share amounts rounded to the nearest 50 cents. |
Discounted Cash Flow Analysis
Consolidated EMC
Morgan Stanley performed a discounted cash flow analysis, which is designed to provide an implied value of a company by calculating the present value of the estimated future cash flows and terminal value of the company. Morgan Stanley calculated ranges of equity values per EMC common share based on discounted cash flow analyses until December 30, 2020 for Consolidated EMC. Morgan Stanley relied on the Street Forecast and
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EMC Adjusted July Case for fiscal years 2015 – 2020 and used the following assumptions: (i) a 15% incremental repatriation tax rate on cash generated offshore, which rate was based on management’s guidance; (ii) stock-based compensation as a cash expense; and (iii) restructuring adjustments as a cash expense. Morgan Stanley then calculated a range of implied values of Consolidated EMC by calculating a range of the present values of EMC’s unlevered free cash flows (defined as net cash provided by operating activities and certain one-off non-operating activities, plus after-tax net interest expense less additions to property, plant and equipment, capitalized software development costs, and after-tax stock based compensation expense) for the period from September 30, 2015 through December 30, 2020, and a terminal value based on an Aggregate Value to EBITDA (“AV / EBITDA”) multiple of 7.2x for the Street Forecast and 8.9x for the Adjusted July Case. Morgan Stanley selected these AV / EBITDA multiples based on the Revenue Growth to EBITDA Regression Framework and estimated forward revenue growth in the terminal year. The estimated forward revenue growth in the terminal year was extrapolated from 2020 by assuming a constant dollar growth in revenue and operating income contribution based on the 2020 July case. The free cash flows and terminal values were discounted to present values as of September 30, 2015 at a range of discount rates of 7.3% to 9.3%. Such range of discount rates, reflecting estimates of Consolidated EMC’s weighted average cost of capital, was derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to its weighted average cost of capital analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.19 based on the U.S. local predicted beta provided by Barra, an estimated risk-free rate of 2.1% based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015, an equity risk premium of 6.0% estimated by Morgan Stanley using its professional judgment and experience, an assumed tax rate of 23.6% based on the Adjusted July Case, and an estimated pre-tax cost of debt of 2.4% based on EMC’s current capital structure. The sum of the discounted free cash flow and terminal values resulted in an estimated Aggregate Value. An estimated equity value was calculated by reducing the Aggregate Value by (i) EMC’s net debt as of June 30, 2015, which was calculated using reported debt balances and reported cash balances adjusted for a 15% incremental repatriation tax rate on offshore cash amounts, and (ii) the estimated fully-diluted equity value of interests in VMware not owned by EMC, calculated using the discounted cash flows of VMware as described in “Analyses Related to VMware – Discounted Cash Flow Analysis”. The resulting equity value was then divided by the fully diluted shares outstanding of EMC which resulted in the following ranges:
| Range (1) | ||||
| Street Forecast |
$ | 31.00 – $33.50 | ||
| Adjusted July Case (without M&A spend) |
$ | 39.00 – $42.00 | ||
| Adjusted July Case (with M&A spend)(2) |
$ | 37.00 – $40.50 | ||
| (1) | Per share amounts rounded to the nearest 50 cents. |
| (2) | Unlevered Free Cash Flow numbers, as described below under “—Certain Financial Projections Related to EMC,” used in this analysis included adjustment to reflect assumption of additional $1 billion per year of incremental M&A spend to sustain growth forecast. |
EMC Core plus VMware
Morgan Stanley performed a separate discounted cash flow analysis by calculating ranges of equity values per EMC common share based on the discounted cash flows of EMC Core plus the discounted cash flows of VMware based on the discounted cash flow analysis of VMware set forth below. Morgan Stanley relied on the Street Forecast and Adjusted July Case for fiscal years 2015 – 2020 and used the following assumptions: (i) a 15% incremental repatriation tax rate on cash generated offshore; (ii) stock-based compensation as a cash expense; and (iii) restructuring adjustments as a cash expense. Morgan Stanley then calculated a range of implied values of EMC by calculating a range of the present values of EMC Core’s and VMware’s unlevered free cash flows for the period from September 30, 2015 through December 30, 2020, and, for the Street Forecast, a terminal value based on an AV / EBITDA multiple of 6.5x for EMC Core and 7.9x for VMware, and for the Adjusted July Case, an AV / EBITDA multiple of 8.1x for EMC Core and 9.7x for VMware. Morgan Stanley selected these AV / EBITDA multiples based on the Revenue Growth to EBITDA Regression Framework and estimated future revenue growth in the terminal year. The free cash flows and terminal values were discounted to
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present values as of September 30, 2015 at a range of discount rates of 7.3% – 9.3% for EMC Core and 7.7 – 9.7% for VMware. Such ranges of discount rates, reflecting estimates of EMC Core’s and VMware’s respective weighted average costs of capital, were derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to each company’s weighted average cost of capital analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.19 for EMC Core and 1.15 for VMware, each based on the U.S. local predicted beta provided by Barra; an estimated risk-free rate of 2.1% for both EMC Core and VMware, based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015; an equity risk premium of 6.0% for both EMC Core and VMware, each estimated by Morgan Stanley using its professional judgment and experience; an assumed tax rate of 23.6% for EMC Core and 20.2% for VMware, each based on the Adjusted July Case; and an estimated pre-tax cost of debt of 2.4% for EMC Core and 1.8% for VMware, each based on such company’s current capital structure. The sum of the EMC Core’s and EMC’s 78% fully-diluted ownership of VMware’s discounted free cash flow and terminal values resulted in an estimated Aggregate Value. An estimated equity value was calculated by reducing the Aggregate Value by EMC Core’s net debt plus 78% of VMware’s net debt as of June 30, 2015, which were both calculated using reported debt balances and reported cash balances adjusted for a 15% incremental repatriation tax rate on offshore cash amounts. The resulting equity value was then divided by the fully diluted shares outstanding of EMC which resulted in the following ranges:
| Range (1) | ||||
| Street Forecast |
$ | 30.00 – $32.50 | ||
| Adjusted July Case (without M&A spend) |
$ | 38.00 – $41.00 | ||
| Adjusted July Case (with M&A spend)(2) |
$ | 36.00 – $39.50 | ||
| (1) | Per share amounts rounded to the nearest 50 cents. |
| (2) | Unlevered Free Cash Flow numbers, as described below under “—Certain Financial Projections Related to EMC,” used in this analysis included adjustment to reflect assumption of additional $1 billion per year of incremental M&A spend to sustain growth forecast. |
Premia Paid Analysis
Morgan Stanley noted the percentage premia paid relative to 30-day average and last twelve month (LTM) high trading prices for selected precedent hardware and software technology transactions since 2002 with a publicly announced transaction value of more than $2 billion (which numbered 40).
Based on the first and fourth quartile median premia of the selected transactions, Morgan Stanley calculated a range of premia relative to EMC’s trading price as of October 7, 2015, the last trading date prior to press reports that Denali and EMC were engaged in discussions regarding a possible transaction. In addition to ranges based off of EMC’s 30-day average and LTM high trading prices, Morgan Stanley also calculated a range based off of EMC’s 1-day spot price as of October 7, 2015 using the selected transactions’ 30-day average premia. This analysis indicated the following:
| EMC Price | Precedent Premia (First – Fourth Quartile) |
Range (1) | ||||||||||
| 1-Day Spot Premium |
$ | 25.96 | 21% –59 | % | $ | 31.50 – $41.50 | ||||||
| 30-Day Prior to Announcement |
$ | 24.24 | 21% –59 | % | $ | 29.00 – $38.50 | ||||||
| LTM High |
$ | 30.89 | (12%) – 34 | % | $ | 27.00 – $41.50 | ||||||
| (1) | Per share amounts rounded to the nearest 50 cents. |
No company or transaction utilized in the precedent premia analysis is identical to EMC or the merger. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, market and financial conditions and other matters that are beyond the control of EMC, such as the impact of competition on the business of EMC or its industry generally, industry growth and the absence of any adverse material change in the financial condition of EMC or its industry or in the financial
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markets in general, all of which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared. Morgan Stanley considered a number of factors in analyzing the implied merger consideration of $33.15 per share, which was calculated by Morgan Stanley based on the offer of $24.05 cash and an estimated 0.111 shares of Class V Common Stock per share of EMC common stock, assuming a valuation for one such share of Class V Common Stock of $81.78, the intraday volume-weighted average price of VMware Class A common stock on October 7, 2015 (the last trading date prior to press reports that Denali and EMC were engaged in discussions regarding a possible transaction). That points in the range of implied present values per EMC common share derived from the valuation of precedent transactions were less than or greater than the implied merger consideration is not necessarily dispositive in connection with Morgan Stanley’s analysis of the implied merger consideration, but one of many factors that Morgan Stanley considered.
Analyses Related to VMware
Discounted Future Equity Value Analysis
Morgan Stanley performed an analysis of the present value per VMware common share of implied future trading prices by applying P/E ratios to estimated one-year forward EPS of VMware on both a no-synergies basis and assuming revenue synergies of $1.1—$1.3 billion attributable to VMware resulting from the merger for year 2017 and year 2019. Morgan Stanley applied such analysis to both the VMware Street Forecast and the VMware Adjusted July Case. For the VMware Street Forecast, Morgan Stanley used a P/E ratio of 15.8x for year 2017 and 14.5x for year 2019. For the VMware Adjusted July Case, Morgan Stanley used a P/E ratio of 15.9x for year 2017 and 16.9x for year 2019. All P/E ratios were derived from the Revenue Growth to Key Valuation Metric Regression Framework and revenue growth rates for the applicable forward year. Morgan Stanley then calculated what the current price of VMware common shares would be if this future share price was discounted back to October 9, 2015, using a discount rate range of 8.0 – 10.0%. Such range of discount rates, reflecting estimates of VMware’s cost of equity, was derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to its cost of equity analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.15 based on the U.S. local predicted beta provided by Barra, an estimated risk-free rate of 2.1% based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015, and an equity risk premium of 6.0% estimated by Morgan Stanley using its professional judgment and experience.
| 2017 Range (1) | 2019 Range (1) | |||||||
| VMware Street Forecast |
||||||||
| No Assumed Synergies |
$ | 75.00 – $78.00 | $ | 70.00 – $75.50 | ||||
| With Assumed Synergies |
$ | 86.00 – $91.50 | $ | 79.50 – $87.50 | ||||
| VMware Adjusted July Case |
||||||||
| No Assumed Synergies |
$ | 71.50 – $74.50 | $ | 78.50 – $84.50 | ||||
| With Assumed Synergies |
$ | 82.50 – $87.50 | $ | 90.00 – $99.00 | ||||
| (1) | Per share amounts rounded to the nearest 50 cents. |
Discounted Cash Flow Analysis
Morgan Stanley calculated ranges of equity values per VMware common share based on discounted cash flow analyses until December 30, 2020 of VMware with and without the assumed synergies described above. Morgan Stanley relied on the Street Forecast and Adjusted July Case for fiscal years 2015 – 2020 and used the following assumptions: (i) a 15% tax rate on cash generated offshore; and (ii) stock-based compensation as a cash expense. Morgan Stanley then calculated a range of implied values of VMware by calculating a range of the present values of VMware’s unlevered free cash flows for the period from September 30, 2015 through December 30, 2020, and a terminal value based on an AV / EBITDA multiple of 7.9x for the VMware Street Forecast and 9.7x for the VMware Adjusted July Case. Morgan Stanley selected these AV / EBITDA multiples based on the Revenue Growth to EBITDA Regression Framework. The free cash flows and terminal values were
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discounted to present values as of September 30, 2015 at a range of discount rates of 7.7% to 9.7%. Such range of discount rates, reflecting estimates of VMware’s weighted average cost of capital, was derived by Morgan Stanley using its experience and professional judgment, with the application of an upward/downward sensitivity of 1.0%/(1.0)% to its weighted average cost of capital analysis and using the Capital Asset Pricing Model, taking into account a predicted beta of 1.15 based on the U.S. local predicted beta provided by Barra, an estimated risk-free rate of 2.1% based on the interest rate of 10-year U.S. Treasury Notes as of October 9, 2015, an equity risk premium of 6.0% estimated by Morgan Stanley using its professional judgment and experience, an assumed tax rate of 20.2% based on the Adjusted July Case, and an estimated pre-tax cost of debt of 1.8% based on VMware’s current capital structure. The sum of the discounted free cash flow and terminal values resulted in the Aggregate Value. The equity value was calculated by reducing the Aggregate Value by VMware’s net debt as of June 30, 2015, which was calculated using debt balances and cash balances as reported in VMware’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2015, adjusted for a 15% repatriation tax rate on offshore cash amounts. The resulting equity value was then divided by the fully diluted shares outstanding of VMware which resulted in the following ranges:
| Range (1) | ||
| VMware Street Forecast |
||
| No Assumed Synergies |
$74.00 – $79.50 | |
| With Assumed Synergies |
$80.50 – $88.00 | |
| VMware Adjusted July Case |
||
| No Assumed Synergies |
$83.50 – $90.00 | |
| With Assumed Synergies |
$92.00 – $101.00 |
| (1) | Per share amounts rounded to the nearest 50 cents. |
Other Factors
Morgan Stanley also reviewed and considered other factors, which were not considered part of its financial analyses in connection with rendering its opinion, but were referenced for informational purposes, including the impact of potential changes in the trading price of VMware Class A common stock on the implied value of the per share merger consideration and the impact of potential changes in the trading price of the Class V Common Stock relative to the VMware Class A common stock on the implied value of the per share merger consideration, in each case as described below.
VMware Class A Common Stock Trading Price
Morgan Stanley reviewed publicly available financial information and considered potential changes in the trading price of VMware Class A common stock in analyzing the implied value of the per share merger consideration to be paid to holders of EMC common stock. Morgan Stanley performed a sensitivity analysis of the trading price of VMware Class A common stock, assuming 50% – 60% of the percentage change in the VMware Class A common stock trading price translates into a change in the EMC common stock share price and further assuming for purposes of calculating the implied value of the Denali offer that the value of the Class V Common Stock is equal to the VMware Class A common stock. Morgan Stanley selected this range based on the application of its professional judgment and experience.
| Illustrative VMware Class A |
Implied EMC Common Stock Price |
Implied Value of Denali Offer |
Implied Premium to EMC Shareholders | |||
| $70.00 | $24.05 - $23.67 | $31.84 | 32.4% - 34.5% | |||
| $75.00 | $24.84 - $24.61 | $32.40 | 30.4% - 31.6% | |||
| $80.00 | $25.63 - $25.56 | $32.95 | 28.6% - 28.9% | |||
| $82.09 (1) | $25.96 - $25.96 | $33.15 | 27.7% - 27.7% | |||
| $85.00 | $26.42 - $26.51 | $33.51 | 26.8% - 26.4% | |||
| $90.00 | $27.21 - $27.46 | $34.06 | 25.2% - 24.0% |
| (1) | Price as of October 7, 2015 (the last trading date prior to press reports that Denali and EMC were engaged in discussions regarding a possible transaction) |
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Class V Common Stock Trading Price
Morgan Stanley also considered potential changes in the trading price of the Class V Common Stock relative to the VMware Class A common stock. Morgan Stanley conducted a sensitivity analysis assuming a discount / premium range of the trading price of the Class V Common Stock relative to the VMware Class A common stock of (5.0%) – 5.0%. Morgan Stanley selected this range based on the application of its professional judgment and experience. The results of this sensitivity analysis were as follows:
| Illustrative Premium
/ |
Implied Class V Common Stock Value |
Implied Value of Denali Offer | ||
| 5.0% | $9.56 | $33.61 | ||
| 2.5% | $9.33 | $33.38 | ||
| 0.0% | $9.10 | $33.15 | ||
| (2.5%) | $8.87 | $32.92 | ||
| (5.0%) | $8.65 | $32.70 |
General
Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor that it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all of the analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of EMC or VMware. In performing its analyses, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, regulatory, economic, market and financial conditions and other matters that are beyond the control of EMC or VMware. These include, among other things, the impact of competition on the businesses of EMC, VMware and the industry generally, industry growth, and the absence of any material adverse change in the financial condition and prospects of EMC, VMware and the industry, and in financial markets in general. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness from a financial point of view of the merger consideration to be received by the holders of EMC common stock pursuant to the merger agreement and in connection with the delivery of its opinion, dated October 11, 2015, to the EMC board. These analyses do not purport to be appraisals or to reflect the prices at which shares of EMC common stock or VMware common stock might actually trade.
The merger consideration to be received by the holders of EMC common stock pursuant to the merger agreement was determined by EMC and Denali through arm’s length negotiations between EMC and Denali and was approved by the EMC board. Morgan Stanley acted as financial advisor to the EMC board during these negotiations but did not recommend any specific consideration to EMC or the EMC board or opine that any specific amount or form of consideration constituted the only appropriate amount or form of consideration for the merger. Morgan Stanley’s opinion and its presentation to the EMC board was one of many factors taken into consideration by the EMC board in deciding to approve and adopt the merger agreement. Consequently, the analyses described above should not be viewed as determinative of the opinion of the EMC board with respect to the consideration to be received by the holders of EMC common stock pursuant to the merger agreement or of whether the EMC board would have been willing to agree to a different form or amount of consideration.
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Morgan Stanley’s opinion was for the information of the EMC board and may not be used for any other purpose without Morgan Stanley’s prior written consent, except that a copy of the opinion may be included in this proxy statement/prospectus. In addition, Morgan Stanley did not express an opinion as to the price at which the Class V Common Stock will trade following consummation of the merger or at any time and Morgan Stanley expressed no opinion or recommendation as to how the shareholders of EMC should vote at the shareholders’ meeting to be held in connection with the merger or as to any other action a shareholder should take relating to the merger.
During the term of its engagement, Morgan Stanley is restricted from providing or arranging financing specifically in connection with the merger, without the prior consent of EMC.
Under the terms of its engagement letter, Morgan Stanley provided the EMC board with financial advisory services and a financial opinion in connection with the merger, described in this section and attached to this proxy statement/prospectus as Annex F, and EMC has agreed to pay Morgan Stanley a fee for its services in an amount estimated, as of the date of Morgan Stanley’s written opinion, to be approximately $68 million, which is contingent upon the completion of the merger. EMC has also agreed to reimburse Morgan Stanley for certain of its expenses incurred in performing its services, including fees and expenses of outside counsel to Morgan Stanley. In addition, EMC has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses arising out of or in connection with Morgan Stanley’s engagement. In the two years prior to October 11, 2015 (the date of the rendering of the fairness opinion), Morgan Stanley and its affiliates have provided financing services for EMC and Denali and have received aggregate fees of approximately less than $100,000 and approximately $20 million, respectively, in connection with such services. In the two years prior to October 11, 2015, Morgan Stanley and its affiliates have provided financial advisory and/or financing services for Silver Lake Partners and certain of its affiliates (including certain majority-controlled portfolio companies of Silver Lake Partners), and have received aggregate fees of approximately $12 million in connection with such services. During the same two year period Morgan Stanley and its affiliates have not provided financial advisory or financing services to VMware for which Morgan Stanley or its affiliates have received fees. Morgan Stanley may also seek to provide financial advisory and financing services to EMC, VMware, Denali and certain affiliates of Denali in the future and would expect to receive fees for the rendering of these services. In addition, a director of EMC is also a member of the Morgan Stanley board of directors and qualifies as an “independent director” under Morgan Stanley’s corporate governance policies.
Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading, prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley, its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of EMC, VMware, Denali or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument. In addition, Morgan Stanley, its affiliates, directors or officers, including individuals working with EMC in connection with the merger, may have committed and may commit in the future to invest in investment funds managed by affiliates of Morgan Stanley that in the ordinary course may hold direct equity and/or partnership interests in private equity funds managed by affiliates of Denali.
