(Bloomberg) — Dell Technologies Inc. said it’s in the early stages of exploring a spinoff of its majority ownership in VMware Inc., a deal that could yield billions, but would separate the hardware giant from its fastest-growing business unit.
Dell’s shares gained about 7% in extended trading after closing at $52.68 in New York. VMware stock, which closed at $139.70 gained more than 2%.
A spinoff “could benefit both Dell Technologies and VMware shareholders,” Round Rock, Texas-based Dell said Wednesday in a statement. Any deal wouldn’t happen before September 2021 at the earliest, for a tax-free transaction, the company said. Dell said it may decide to maintain its current 81% ownership of VMware or pursue another strategic option.
Chief Executive Officer Michael Dell has spent the better part of a decade doing corporate engineering to boost his eponymous company’s fortunes. He took his company off the market in 2013 so it could restructure without pressure from public investors. In 2016, he orchestrated the largest technology acquisition that’s ever been successfully pulled off, buying storage company EMC Corp. for $67 billion. That deal came with the ownership stake in VMware and other businesses, but also saddled Dell with a large debt load. It produced a company that makes personal computers, data-center hardware, cybersecurity products and other software.
In 2018, Dell returned to the public market by taking the place of a tracking stock meant to represent the value of the company’s VMware stake. As part of the process, Dell forced VMware to pay a special dividend to appease investors in the tracking stock, who wanted more money to approve the transaction.
In the years since the EMC deal, VMware has grown while Dell’s personal computer and server revenue has see-sawed. Dell and VMware also are close partners on compatible products and sales strategies. But as a publicly traded company, VMware’s robust profitability hasn’t directly helped Dell pay down its debt. Dell also believes its share price has suffered from a conglomerate discount, in which a large company is valued at less than the sum of its parts, and a spinoff could spark both companies’ stocks higher, a person familiar with the situation said.
A spinoff of its VMware stake also would infuse Dell with cash to pursue its goal of having investment-grade credit. In its statement, the company said VMware would pay a special dividend to shareholders, including Dell, as part of the divestment — essentially an exit fee in exchange for VMware’s independence. Proceeds from that special dividend would help pay down Dell’s debt, said the person, who wasn’t authorized to speak publicly about the matter.
In May, Dell reported it repaid $5.4 billion in debt during the fiscal first quarter, leaving it with $48.4 billion in long-term debt.
Dell also said it wants VMware to have a strong credit profile after a possible transaction, but the software maker may need to borrow to fund the special dividend, the person said.
During Dell’s last major strategic review in 2018, the company considered buying all of VMware. Then and now, a full acquisition seems too complex to pull off, the person said, because the companies, their business models and their cultures are so different. A spinoff remains the preferred option for Dell and VMware, but there will be an extensive negotiation process.
A key part of the negotiations will center on a commercial agreement between Dell and VMware that would formalize aspects of its current working relationship. In such a pact, the companies would commit to continue collaborating on sales strategies, research and development, services and intellectual property agreements, Dell said.
(Updates with additional details starting in fourth paragraph.)
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