VMware 2015 Annual Report Download - page 28

TableofContents
respecttomattersinvolvingbothusandEMCthatcouldhavedifferentimplicationsforEMCthantheydoforus.Provisionsofourcertificateofincorporationand
themastertransactionagreementbetweenEMCandusaddresscorporateopportunitiesthatarepresentedtoourdirectorsorofficersthatarealsodirectorsor
officersofEMC.Theseprovisionsmaynotadequatelyaddresspotentialconflictsofinterestorensurethatpotentialconflictsofinterestwillberesolvedinour
favor.Asaresult,wemaynotbeabletotakeadvantageofcorporateopportunitiespresentedtoindividualswhoareofficersordirectorsofbothusandEMCor,if
theDellAcquisitioniscompleted,Denali,andwemaybeprecludedfrompursuingcertaingrowthinitiatives.
EMC’s ability to control our board of directors may make it difficult for us to recruit independent directors.
SolongasEMCor,iftheDellAcquisitioniscompleted,Denalibeneficiallyownssharesofourcommonstockrepresentingatleastamajorityofthevotes
entitledtobecastbytheholdersofoutstandingvotingstock,EMCor,iftheDellAcquisitioniscompleted,Denalicaneffectivelycontrolanddirectourboardof
directors.Further,theinterestsofEMC,Denaliandourotherstockholdersmaydiverge.Underthesecircumstances,personswhomightotherwiseacceptour
invitationtojoinourboardofdirectorsmaydecline.
Our historical financial information as a majority-owned subsidiary of EMC may not be representative of the results of a completely independent public
company.
Thefinancialinformationcoveringtheperiodsincludedinthisreportdoesnotnecessarilyreflectwhatourfinancialcondition,operatingresultsorcashflows
wouldhavebeenhadwebeenacompletelyindependententityduringthoseperiods.Incertaingeographicregionswherewedonothaveanestablishedlegal
entity,wecontractwithEMCsubsidiariesforsupportservicesandEMCpersonnelwhoaremanagedbyus.ThecostsincurredbyEMConourbehalfrelatedto
theseemployeesarepassedontousandwearechargedamark-upintendedtoapproximatecoststhatwouldhavebeenchargedhadwecontractedforsuch
serviceswithanunrelatedthirdparty.Thesecostsareincludedasexpensesonourconsolidatedstatementsofincome.Additionally,weandEMCengagein
intercompanytransactions,includingagreementsregardingtheuseofEMC’sandourintellectualpropertyandrealestate,agreementsregardingthesaleofgoods
andservicestooneanotherandtoPivotal,andanagreementforEMCtoresellourproductsandservicestothirdpartycustomers.IfEMCweretodistributeits
sharesofourcommonstocktoitsstockholdersorotherwisedivestitselfofallorasignificantportionofitsVMwareshares,therewouldbenumerousimplications
toVMware,includingthefactthatVMwarecouldlosethebenefitofthesearrangementswithEMC.TherecanbenoassurancethatVMwarewouldbeableto
renegotiatethesearrangementswithEMCoritssuccessor-in-interest(includingDenali,iftheDellAcquisitioniscompleted)orreplacethemonthesameor
similarterms.Additionally,ourbusinesscouldfacesignificantdisruptionanduncertaintyaswetransitionfromthesearrangementswithEMC.Moreover,our
historicalfinancialinformationisnotnecessarilyindicativeofwhatourfinancialcondition,operatingresultsorcashflowswillbeinthefutureifandwhenwe
contractatarm’slengthwithindependentthirdpartiesfortheserviceswehavereceivedandcurrentlyreceivefromEMC.During2015,werecognizedrevenuesof
$428million,andasofDecember31,2015,$306millionofsaleswereincludedinunearnedrevenuesfromsuchtransactionswithEMC.Foradditional
information,see“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”andourconsolidatedfinancialstatementsandnotes
thereto.
Risks Related to Owning Our Class A Common Stock
The price of our Class A common stock has fluctuated substantially in recent years and may fluctuate substantially in the future.
ThetradingpriceofourClassAcommonstockhasfluctuatedsignificantlyinthepastandcouldfluctuatesubstantiallyinthefutureduetothefactors
discussedinthisRiskFactorssectionandelsewhereinthisreport.Inparticular,ourstockpricedeclinedsignificantlyfollowingtheannouncementoftheDell
Acquisitionandfollowingsubsequentannouncementsoffinancialresultsandourguidanceforfutureoperatingresults.Theperiodsincetheannouncementofthe
DellAcquisitionhasalsocoincidedwithageneraldownturninsharepricesoftechnologycompanies.Futureannouncementsconcerningthesematters,aswellas
continuingvolatilityintechnologycompanyshareprices,couldalsoleadtovolatilityinourstockprice.
EMC,whichholds81.3%ofouroutstandingstockisnotrestrictedfromsellingitssharesandisentitledtocertainregistrationrights.Ifasignificantnumberof
sharesentersthepublictradingmarketsinashortperiodoftime,themarketpriceofourClassAcommonstockmaydecline.Inaddition,ifourClassBcommon
stockisdistributedtoEMCstockholdersandremainsoutstanding,itwouldtradeseparatelyfromandpotentiallyatapremiumtoourClassAcommonstock,and
couldtherebycontributeadditionalvolatilitytothepriceofourClassAcommonstock.
BroadmarketandindustryfactorsmayalsodecreasethemarketpriceofourClassAcommonstock,regardlessofouractualoperatingperformance.The
stockmarketingeneralandtechnologycompaniesinparticularhaveoftenexperiencedextremepriceandvolumefluctuations.Ourpublicfloatisalsorelatively
smallduetoEMC’sholdings,whichcanresultingreatervolatilityinourstockcomparedtothatofothercompanieswithamarketcapitalizationsimilartoours.In
addition,inthepast,followingperiodsofvolatilityintheoverallmarketandthemarketpriceofacompany’ssecurities,securitiesclass
27