Why VMware, Inc. Fell Monday

Source: VMware.

What: Shares of VMware were down 10.7% as of 1:25 p.m. Monday, as privately held Dell announced plans to acquire the virtual computing veteran's majority owner, EMC .

So what: The EMC buyout is a blockbuster deal. In a mostly cash-backed transaction involving Dell itself, its founder Michael Dell, as well as private equity firms Silver Lake Partners, Temasek, and MSD Partners, something like $67 billion is changing hands.

As part of the deal, some 65% of EMC's VMware shares will be spun out into a new tracking stock . Dell will hold on to roughly 28% of VMware's total market value, allowing 53% to land in the new tracking stock, and leaving 20% directly in the hands of VMware shareholders.

Dell places an estimated value of $9.10 per share on the new tracking stock, which boils down directly from VMware's independent share price as of Wednesday, Oct. 7.

Moreover, the two target companies decided to publish preliminary results for the third quarter. In VMware's case , we're looking at adjusted earnings of approximately $1.02 per share on sales of $1.67 billion. These results are at least in line with Wall Street's current expectations, though the bottom-line figure might see some revision in the full report on Oct. 20.

Now what: There's no obvious reason for panic here. The preliminary results are solid, VMware will remain an independent company, and the sky isn't falling. Meanwhile, EMC shareholders saw their shares locking in a buyout deal that's been rumored since last Wednesday, driving the stock some 10% higher in the process.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

And with financial debt of just 1.5 times trailing EBITDA profits, Eros compares well with stateside rivals at 3.4 times EBITDA, or , whose ratio stands at 2.8. Lions Gate and CBS are also increasing their effective debt load, while Eros is reducing its own.

Not fair, is it? But then, EMC found a firm buyer while VMware didn't. Dell is keeping the virtual computing expert at arm's length here, rather than paying a premium for that business, too. Of course, VMware could go hunting for a buyer of its own, but a deal would most likely need the Dell group's final say-so and that idea doesn't look terribly likely right now.

So VMware is kind of up in the air for now, adding uncertainty to a stock that always traded at rich valuation multiples to begin with. Risk plus high expectations often equals sudden drops, and that's what happened here today.

Long story short, VMware investors didn't get a sweetened buyout offer today, even as majority owner EMC most certainly did. So Mr. Market gets to show off his nervous side again.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends VMware. Try any of our Foolish newsletter services free for 30 days .We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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