Dell Technologies founder, Chairman and CEO Michael Dell told CRN that the company’s proposed spin-off of its 81 percent stake in VMware will simplify capital structures, enhance flexibility and won’t affect the two companies’ tight technology and go-to-market partnership.
“Look, we believe that this spin-off that we’re considering could benefit both the Dell Technologies and the VMware stockholders,” said Dell in an interview with CRN. “It simplifies the capital structures, 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 and it continues to.”
Dell also told CRN that there has been some confusion in the market regarding Dell Technologies’ proposal to spin off its 81 percent stake in VMware.
“So this is different from selling VMware—we are not selling VMware, by the way. Some people are a little confused about that,” said Dell. “Our core business is healthy. It’s got runway to continue to generate growth for years to come regardless of what structure we use, but this is certainly another example of our focus on creating value for the benefit of all of our shareholders. It doesn’t in any way change our strategy with VMware.”
In July, the Round Rock, Texas-based $91 billion infrastructure giant confirmed it is in the early stages of exploring whether to spin off its 81 percent stake in VMware, which the company acquired through the blockbuster $67 billion acquisition of EMC in 2016.
The proposal is to spin off its stake in VMware to Dell Technologies and VMware shareholders in order to boost its credit rating, help Dell quickly achieve an investment grade rating, attract new investors, and potentially lower its $48 billion in long-term debt stemming from the EMC purchase.
Just this week, VMware CEO Pat Gelsinger discussed the matter at Citi’s 2020 Global Technology Virtual Conference.
“Anything that we do, our objective would be to be value-enhancing to the full breadth of stakeholders,” said Gelsinger. “And from a customer and partner lens, it would be continuing the good momentum, even as we potentially broaden some of the reach and ecosystem activities of the company.”
If the spin-off is approved, VMware will pay a special dividend to shareholders, the largest of which are Michael Dell and his private equity partner, Silver Lake.
Michael Dell currently owns approximately 52 percent of Dell Technologies while Silver Lake owns nearly 14 percent. If the spin-off is completed, Michael Dell will own approximately 42 percent of VMware, while Silver Lake will hold about 11 percent.
Michael Dell told CRN that both customers and channel partners benefit “tremendously” from Dell and VMware’s go-to-market and joint innovation partnership.
For example, Dell and VMware in 2016 created VxRail , and Dell Technologies is now the market leader in hyperconverged infrastructure, owning more than 33 percent global share. Over the years, VMware and Dell have launched a slew of joint products around hybrid cloud, end-user computing, converged infrastructure and software-defined networking, to name a few.
“When we look at the data, we see that our partners who sell our three main lines of business— server, storage and client—generate 12 times as much revenue as those who sell two lines of business. And 45 times as much as those who sell only one,” said Dell. “The real bonus is if you sell VMware and the three [lines of business], it’s 138 times more compared to partners that only sell one. So it’s a pretty simple test. You want to be selling VMware and all three of those [lines of business] together. That’s why our partners are delivering great value and great solutions.”
In terms of the time frame, Dell confirmed it would not spin off its shares of VMware before September 2021 for tax reasons. The company is seeking to get the proposal to qualify as tax-free for federal income tax purposes.