VMware is set to become an independent company for the first time since 2004 with next week’s spin-off from Dell Technologies, paving a new chapter for the virtualisation and hybrid cloud software superstar.
Dell will sell off its 81 percent majority stake in VMware in a move to improve its capital structure and attract new investors as its Client Solutions Group—which includes PCs, laptops, monitors and notebooks—is hotter than it’s ever been in the company’s long history.
First unveiled to the world in July 2020, Dell’s spin-off of VMware is set to be completed next week on Nov. 1.
The stock transactions and shareholder payouts portion of the deal are set to be finalized on Friday, Oct. 29, according to recent Dell and VMware filings with the U.S Securities and Exchange Commission.
From VMware’s US$11.5 billion special dividend payout to Dell and its M&A strategy as an independent company, to how shareholders and Dell will benefit from the deal, CRN breaks down eight big things to know about this blockbuster IT deal.
VMware will acquire more companies
VMware as an independent company will be able to fund and conduct more acquisitions to drive growth with CEO Raghu Raghuram expecting more cloud-based M&A ahead.
“VMware has historically grown its business through acquisitions. Currently, VMware faces constraints in issuing additional equity for use in acquisitions due to potential deconsolidation of VMware from Dell Technologies and its subsidiaries if Dell Technologies does not own a certain percentage of VMware. As such, VMware has often not been able to issue equity to facilitate such acquisitions,” said the two companies in a filing with the SEC. “The separation of Dell Technologies and VMware is expected to better position VMware to issue equity to fund future acquisitions.”
In fact, VMware’s Raghuram told CRN in a recent interview about VMware’s acquisition strategy post-Dell.
Raghuram said VMware will acquire companies that fit into its multi-cloud strategy and that the “frequency” of smaller acquisitions in multi-cloud will pick up because VMware’s capital structure will be more flexible.
“Where we are today in our evolution is we are building out this multi-cloud portfolio that we’ve talked about. We will continue to acquire companies that fit into this portfolio,” said Raghuram in an interview with CRN. “So that’s where I expect the bulk of our [M&A] activity to come from. I expect continued activity with respect to small, tiny tuck-ins of companies as we see fit.”
Michael Dell and Silver Lake to own more than half of VMware
Dell Technologies founder, chairman and CEO Michael Dell will become the single largest shareholder of VMware stock post spin-off.
With Michael Dell being the largest Dell Technologies shareholder today, he is expected to own approximately 42 percent stake in VMware when the deal is complete.
Additionally, Dell’s private equity partner Silver Lake will hold about 11 percent share in VMware when the transaction is finished.
This means that Michael Dell and Silver Lake will retain an approximately 53 percent majority stake in VMware.
Michael Dell is also currently VMware’s chairman of the board, a position he will keep post spin-off.
“Look, I’ll continue to be the chairman of both companies and the largest shareholder of both companies,” Michael Dell recently told CRN in an interview. “Dell and VMware are going to partner super closely together.”
Improve hiring and employee retention
One interesting benefit for both companies will be attracting and retaining top executives and new employees, according to an SEC filing.
Dell and VMware said they will seek to attract and retain highly qualified management and employees through an incentive system that includes equity-based compensation, post spin-off.
“We believe the expected enhancement in value of each company from the separation will further improve the equity rights that officers and employees currently have and the equity rights under future grants,” said Dell in a SEC filing.
“Further, Dell Technologies management believes that more directly aligning the interests of its remaining employee’s post-separation will allow the business to attract prospective employees with appropriate skill sets, motivate key employees and retain key employees for the long term,” Dell said.
VMware has approximately 34,000 employees worldwide, while Dell’s global headcount stands at around 158,000.
Dell and VMware to improve credit rating, attract new investors
Both Dell and VMware are impacted by each other’s current structure for capital allocation.
For example, Dell’s large debt “has adversely impacted the credit ratings of VMware,” said VMware in an SEC filing. “VMware’s credit ratings will no longer be impacted by the debt of Dell Technologies and its remaining subsidiaries following the separation.”
Dell Technologies intends to use its pro rata amount of VMware’s US$11.5 billion special cash dividend to repay a portion of its outstanding debt, which is expected to further enhance Dell’s credit rating and help the company achieve investment-grade credit rating.
Dell is going to use the US$11.5 billion to help pay down its massive debt of roughly over US$40 billion.
The hope is to attract new investors to both companies via a better credit rating and the ability for investors to invest in one company, compared to two.
Stockholder details of the transaction
Dell has approved the distribution of a special stock dividend to Dell Technologies stockholders of all its shares of Class A and Class B common stock of VMware, which represents 81 percent of the shares of VMware common stock.
Each share of VMware Class B common stock will be converted into one share of VMware Class A common stock in connection with the deal and prior to the receipt by Dell Technologies stockholders of such shares, according to an SEC filing.
The distribution of shares will be made to all Dell Technologies shareholders of record as of 5 p.m. ET on Oct. 29, 2021. The share distribution will take place in the form of a pro rata common stock dividend to each Dell Technologies shareholder as of the record date.
Dell shareholders will receive approximately 0.44 shares of VMware for each share of Dell Technologies that they hold, based on shares outstanding today.
The distribution of shares related to VMware’s spin-off from Dell is “generally intended to qualify as tax free to Dell Technologies stockholders” for U.S. federal income tax purposes, said Dell.
Five-year commercial agreement in place
Dell gained its 81 percent majority stake in VMware via its blockbuster US$67 billion acquisition of EMC in 2016.
Over the past five years, Dell and VMware have been on a product innovation and go-to-market tear with some of the industries tightest jointly engineered product offerings and channel partner sales synergies, including channel incentives to sell Dell and VMware solutions together as well as customer cost savings. VMware and Dell executives want this successful sales and technology innovation partnership to remain after the spin-off.
Because of its wild success and joint customer base, Dell and VMware have committed to a five-year commercial agreement to keeping its technology and sales synergies intact.
“We’ve created a unique and differentiated commercial agreement that essentially formalizes all the things we’ve been doing,” Michael Dell recently told CRN. “So you know about Vx:Rail, all the stuff we’ve been doing with SD-WAN, software-defined networks, and all the joint product developments around supporting VMware Cloud Foundation and the multi-cloud platforms—all that continues uninterrupted. The companies will continue to partner in a super strong way.”
VMware CEO outlook: VMware can now become the ‘Switzerland’ of multi-cloud
VMware’s CEO Raghuram told CRN that his company is looking to becoming the “Switzerland” of multi-cloud in the IT industry.
“If you think about multi-cloud, what we really are saying is that we want to be the Switzerland of the industry. So if you want to be the Switzerland of the industry, then you want to be a stand-alone independent company, and that’s where we are headed,” said Raghuram.
Being an independent company enables VMware to partner with new vendors to create joint solutions or expand on existing partnerships such as with public cloud market leaders.
“It will allow partners that previously were competitors of Dell to now look at VMware with new life and say, ’Hey, we can do strategic things with VMware,’” said Raghuram.
Additionally, VMware will be able to make “acquisitions and organic investments favorable to itself and its future growth without regard to the goals of Dell Technologies’ business,” said the company in an SEC filing.
Raghuram said the spin-off will be a “best-of-both-worlds” situation. “At the same time, we have a fantastic relationship with Dell who we do a tremendous amount of business with. We have certified that into a commercial framework agreement and a technology agreement that allows for continued deepening technology and business collaboration with Dell,” he said.
Michael Dell: ‘The headline is: Don’t expect any big changes’
Michael Dell is confident that the spin-off will boost both his company through a greatly improved capital structure, including the paying down of billions in debt, while also keeping a firm hold of its successful VMware partnership.
“It does simplify our ownership structure and capital structures that unlocks shareholder value and drives down our debt. We’ve been paying down debt aggressively, and this will accelerate all of that,” he said, adding that the Dell-VMware relationship “has never been stronger”.
Most importantly, Dell said its massive customer and channel partner base won’t feel any negative impacts from the spin-off.
“From a customer and partner perspective, the headline is: don’t expect any big changes. It’s great news for all of our stakeholders,” said Michael Dell. “I’ve explained this to certainly hundreds of customers one-on-one and everybody’s like, ‘Great. We get it.’ … This absolutely creates additional growth opportunities for both Dell Technologies and for VMware.”