Plan would be to preserve deep technology, services relationship between two companies
Less than a month after rumors began circulating, Dell Technologies this week is confirming that it’s exploring the idea of spinning off its majority stake in VMware, a move that would simplify its capital structure and enable it to reduce debt.
The Lowdown: Dell said it’s in the early stages of exploring the idea and that it’s evaluating other options for VMware. A spinoff of the hybrid cloud and virtualization company wouldn’t happen until September 2021, when Dell could avoid any tax hit. Companies in a spin-off must have operated continuously for five years to complete the transaction tax-free.
The Details: Dell inherited VMware when it bought storage giant EMC – which at the time owned most of VMware – in 2016 for $67 billion. The deal brought Dell EMC, VMware, and several other companies, but also put heavy debt into its books. According to Reuters, Dell is carrying $57.3 billion in debt, most of it the result of the EMC deal.
Dell owns about 81% of VMware, a stake worth about $50 billion.
Should Dell spin off VMware, it will work to formalize commercial arrangements it has with the company. Dell and VMware have deep product integrations and VMware is a foundational part of Dell’s expanding multicloud strategy – VMware’s Cloud Foundation platform is integral to Dell Technologies Cloud, and Dell’s Cloud Data Center-as-a-Service is based on VMware Cloud on Dell EMC. In addition, the two companies are tied together through agreements around services, R&D, go-to-market, and intellectual property.
In addition, if there is a spin-off, Dell will push to have VMware pay a special cash dividend to VMware shareholders.
Background: Dell bought EMC with the idea of becoming a complete enterprise solution provider, from PCs to data center systems and now out to the cloud and the network edge. VMware has been a key part of the strategy. The company that started off as a pioneer in the virtualization space is now a significant player in the hybrid cloud space, with a broad array of partners that include not only Dell but also such public cloud service providers as Amazon Web Services, Microsoft Azure, and Google Cloud.
The Buzz: “The strategic relationship between Dell Technologies and VMware has never been stronger,” said Dell Chairman and CEO Michael Dell. “For more than 20 years, we’ve innovated for our customers and created substantial growth and value for both companies and our teams. Regardless of the options we are exploring to create additional value, we are accelerating our strategy – which remains unchanged. We are focused on winning in the consolidating markets where we operate and innovating across the Dell Technologies portfolio to create integrated solutions that turn data into insights and action.”