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Dell divests VMware and collects its $49 billion debt



Dell divests VMware and collects its 49 billion debt

To buy. No sale. It all gets confusing sometimes.


Especially when Dell will officially run from this week week VMware. You know, same VMware, it’s just like purchased in 2016.

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The Palo Alto company is an exquisite piece of real estate in Silicon Valley.

As the first to successfully virtualize the x86 architecture, it continues to be a major player in cloud-readying businesses and virtualizing their data centers.

Pop the top: The EMC acquisition helped Dell move beyond selling computers — and included VMware.  (Source: David Precious on Flickr CC2.0)

Pop the top: The EMC acquisition helped Dell move beyond computer sales and include VMware.
(Source: David Precious on Flickr CC2.0)

Dell (the company) acquired an 81% stake in VMware when it bought data management company EMC for an amount it had announced as a record $67 billion.

Dell (the CEO, Michael Dell, the company founder) will remain chairman of VMware.

And VMware is also entering into a five-year commercial agreement, set up to automatically renew each year, to partner with Dell and share sales teams and financial services.

About 35% of VMware’s revenue comes from the Dell sales force that sells it.

The spin-off is especially eye-catching as it settles one of the largest tech acquisitions ever.


By buying EMC, Dell lost its skin as a maker of personal computers and started getting half of its revenue from servers, storage and networking instead.


So why would you do it? After all, VMware is Dell’s best-performing unit right now, flattered by companies cutting costs and moving to the cloud during COVID-19.

And what are VMware’s prospects, now that it stands boldly on its own two feet? (Not to mention that its longtime CEO Pat Gelsinger was in charge of Intel three months ago, leaving Zane Rowe as interim chief.)

For sale, expensive

Dell’s debt is huge: $48.5 billion last quarter.

This debt led to a “conglomerate discount,” where to many investors the sum of Dell and VMware seemed less than the parts.

This was only more true with the insanely bizarre ownership structure that tied Dell to VMware.


The remaining 19% of VMware stock continued to be publicly traded even as Dell issued a second-class “tracking stock” in the company.

Rating agency Fitch predicted that Dell would now be able to make a “significant debt reduction”, removing $9.3 to $9.7 billion of its debt from the spin-off, plus an additional $5 billion in debt. organic debt reduction.

And Fitch tipped Dell’s credit rating to improve as a result, issuing a “watch positive” action saying his BB+ rating was now beginning to resemble a much sturdier (and investment-worthy) BBB.

Analysts generally agreed that the move widely expected since June was a good one.

Citigroup CEO Jim Suva said removing VMware’s odd share structure removed the “complexity overhang.”

Morgan Stanley analyst Katy Huberty agreed that Dell has historically traded at a discount to the sum of its parts.


Birth of a seller

If we’ve learned one thing from Deliveroo’s IPO flop, it’s that markets really don’t like complex stock structures.

Fortunately, VMware is dropping its dual-class structure and converting its “supervoting” Class B shares into a single class of nice, neat single-vote shares. An advantage of this simplified stock structure could be its inclusion in the S&P 500 index.

Each Dell shareholder will receive 0.44 shares of VMware, after which VMware will pay its shareholders a special dividend of between $11.5 and $12 billion.

For this dividend, VMware uses $2.5 to $3.5 billion in cash and borrows the rest.

But should Dell have just sold VMware to a third party?


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This could add an even bigger kick to the company’s debt mountain. Though the five-year partnership deal with his ex may have been trickier to sell to his new owners.

Meanwhile, Dell might try the same trick twice. It acquired Cloud integration software company Boomi in 2010. The sale of these could bring Dell another $3 billion.

Once Dell has figured out what the markets seem to agree on, it’s a good move. Dell may be tempted to play the same card again.

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Pdraig Belton, contributing editor especially for Reading light


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