Dell Technologies is set to spin off its 81% stake in VMware to create two separate entities in order to generate billions of dollars in cash to pay down its debt.
The move will decouple a relationship that was formed when Dell merged with VMware’s parent company EMC in 2016 in a $67 billion deal. This deal gave the hardware manufacturer the opportunity to branch out in terms of its business pursuits but resulted in the firm taking on substantial debt.
The terms of the spin-off include a simplification to the corporate ownership structure, as well as an $11.5 billion to $12 billion cash dividend to all VMware stockholders. Dell Technologies will receive up to $9.7 billion in a payout following the spin-off too, which it’ll use towards paying down the debt it's accrued.
“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders," said Dell CEO Michael Dell.
“Both companies will remain important partners, with a differentiated advantage in how we bring solutions to customers.”
The virtualisation firm is hoping to create a holistic software platform across various cloud and hardware deployments to fuel its customers' digital transformation efforts. Dell claims this spin-off will give VMware greater flexibility in terms of pursuing this strategy, as well as its operations and financial management.
The two companies will also continue to collaborate and co-engineer systems for their customers, through its commercial agreements, with Dell continuing to provide the capacity to scale VMware’s product portfolio. The two firms will also retain a partnership in terms of their sales and marketing operations.
Dell has been mulling a major change in its relationship with VMware for some time, practically ever since it acquired the company by default as part of its merger with EMC.
Although Dell first filed documents with the US Securities and Exchange Commission (SEC) in July 2020 for a prospective spin-off, it once considered a move in the opposite direction.
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The firm made a filing with the SEC in May 2018 for a full merger, or reverse spinoff, with VMWare. This submission was made before Dell became a publicly trading company in December of that same year, however, in order to raise funds. The company first went public in 1988 before it went private in 2013 in a deal worth $22 billion.
The deal to spin-off VMware isn’t expected to begin until September 2021, five years after the EMC acquisition closed, at which point any movement of stock will become tax-free.
VMware would retain its own management structure, with Zane Rowe continuing as interim CEO and Michael Dell serving as chairman of the VMware board.
