What to know about Dell’s VMware spin-off

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What to know about Dell’s VMware spin-off
Michael Dell (Dell)

Nearly a year after reports first emerged that Dell Technologies might spin off virtualization leader VMware as a standalone company, the plan is now official. On Wednesday, Dell announced that it expects to spin off its 81-percent share of VMware stock during the fourth quarter of the year. The move will create two standalone companies while making sure to preserve the close partnership between Dell and VMware around technology development, sales and marketing, according to the announcement. “With a strong commercial agreement in place, Dell Technologies will have the ability to continue to work closely with VMware to drive innovation and preserve go-to-market synergies while generating new growth opportunities through an open ecosystem,” Dell said in its news release announcing the spin-off plan.

Background

While both Dell Technologies and VMware are publicly traded companies, Dell has held its 81-percent stake in VMware since its US$67 billion acquisition of EMC Corp. in September 2016. EMC had owned VMware since 2004.

Reports first emerged last June that Round Rock, Texas-based Dell Technologies was considering a spin-off of its VMware stock holding–with Dell confirming the following month that it was at an “early stage” of evaluating the idea.

In January, Michael Dell, chairman and CEO of Dell Technologies, said in a statement to CRN that nothing was changing with the potential VMware spin-off with the departure of VMware CEO Pat Gelsinger to become chief executive of Intel.

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Reasons for the Spin-off

In an interview with CRN last September, Michael Dell said that spinning off VMware would simplify capital structures and boost both companies. “It enhances strategic flexibility and gives both companies more flexibility–while we continue with the mutually beneficial strategic and commercial partnership that we’ve had for many, many years that has worked extremely well,” Michael Dell said at the time.

In a news release Wednesday, Michael Dell said the spin-off will “drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders.”

Thanks to “an even stronger capital structure” following the VMware spin-off, “Dell Technologies is poised to further capitalize on the rebound in infrastructure and PC spend, new cloud operating models driving as-a-service growth, compute moving to the edge, and customers’ longer-term digital transformation initiatives,” the company said in the news release.

Paul Clifford, president of Davenport Group, a longtime partner of Dell and VMware, told CRN that “the two are completely different companies. At the core, they are now trying to unleash VMware to be VMware and Dell Technologies to be Dell Technologies, and at the same time free up cash.”

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Remaining close partners

After the spin-off transaction closes, “both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customer,” Michael Dell said in the news release Wednesday.

The plan is that a commercial agreement between Dell and VMware will “preserve the companies’ unique and differentiated approaches to the co-development of critical solutions and alignment on sales and marketing activities,” Dell Technologies said in the news release.

In an interview with CRN in March, Michael Dell said that the Dell-VMware partnership “continues to grow and get stronger.”

“We continue to partner closely together on hyperconverged infrastructure, on multi-cloud, all the work we’re doing around storage and data protection, the edge,” Michael Dell said during the interview. “There’s a lot on the agenda for VMware and Dell Technologies together.”

In the interview with CRN last September, Michael Dell said that the spin-off “doesn’t in any way change our strategy with VMware.”

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Financial details

Dell’s VMware spin-off is subject to conditions including receipt of a “favorable IRS private letter ruling” and an opinion that the spin-off will be “generally tax-free” for Dell Technologies shareholders, the company said in its news release.

With the closing of the transaction, VMware shareholders would receive a special cash dividend of between US$11.5 billion and US$12 billion. Dell Technologies stands to receive US$9.3 billion to US$9.7 billion, with the net proceeds planned to be used for paying down debt, Dell said.

For Dell shareholders, the deal would provide 0.44 shares of VMware for each Dell Technologies share that they hold as of today.

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Leadership after the spin-off

Michael Dell will stay on as chairman of VMware’s board after the spin-off, according to the announcement Wednesday. For now, Zane Rowe remains as interim CEO of VMware—a role that he’s held following the departure of Gelsinger in February. However, VMware is in the midst of its search for a new permanent CEO. In the interview with CRN in March, Michael Dell noted that there were “lots of great candidates” for the permanent VMware CEO role.

Following Dell’s VMware spin-off, the board of directors at VMware will not change, according to the announcement Wednesday.

This article originally appeared at crn.com

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