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Dell's Planned Spinoff of VMware Will Benefit Both Companies

Dell Technologies is spinning off VMware, the virtualization pioneer and hybrid cloud software provider that the company inherited when it acquired storage giant EMC for about $60 billion five years ago. The move ends years of speculation about the futures of the two companies and is another step in helping Dell pay down the massive debt it took on with the EMC acquisition.

Dell owns about 81 percent of VMware shares – worth about $52 billion, according to the Wall Street Journal – and the move to spin off the company could bring in more than $9 billion to Dell after the deal closes later this year.

The decision announced this week puts to rest questions about the two companies that arose even before Dell’s deal for EMC closed in 2016. At the time Michael Dell reiterated several times that he had no plans to shed VMware once EMC was brought into the fold. Two years after the EMC acquisition closed, there were reports of a possible reverse merger, with VMware buying Dell. 

Dell officials have been talking about spinning off VMware since last year, a move that they said would give each company greater flexibility in their strategies.

Growth Opportunities for Both Companies

In a statement this week, Dell CEO Michael Dell said that spinning off VMware will deliver growth opportunities for both companies and bring greater value to stakeholders. Dell also reiterated the close working relationship between the two companies will continue.

“Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers,” he said. “At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom.”

For its part, a spinoff could give VMware – which was founded in 1998 and acquired by EMC in 2004 – greater ability to move forward with its strategy, simplify its capital structure and governance model and afford it greater financial flexibility, said Zane Rowe, the company’s chief financial officer and interim CEO. Longtime CEO Pat Gelsinger left the company in February to take the helm of Intel.

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“We will have an enhanced ability to extend our ecosystem across all cloud vendors and on-premises infrastructure vendors and a capital structure that will support growth opportunities,” Rowe said in a statement. “Our strategic partnership with Dell Technologies remains a differentiator for us, and, as we execute on our multicloud strategy, we continue to provide customers our solutions and services on any public cloud and any infrastructure.”

Once the spinoff is complete, Michael Dell will be chairman of both the Dell and VMware boards of directors and Rowe will remain interim CEO until the board makes a permanent choice.

The plan calls for VMware, once the transaction closes, to distribute a special cash dividend of $11.5 billion to $12 billion to its shareholders, which includes Dell. Based on the 80.6 percent of shares Dell owns, the company will receive between $9.3 billion and $9.7 billion, money company officials said will be used to lower the debt and improve its financial structure.

Virtualization Pioneer Will Remain Close to Dell

VMWare's server and data center virtualization technology, launched in 1999, became the primary computing paradigm of the last 20 years. In recent years, the company has become a premiere supplier of software for hybrid cloud and multicloud environments, including making it available on Amazon Web Services (AWS), the world’s largest public cloud provider. Dell and VMware also have worked closely in these efforts, with offerings in the VMware Cloud portfolio also available on Dell infrastructure and tightly integrating their products and technologies.

Like most of their rivals, both Dell and VMware are moving quickly to adapt to a rapidly changing IT environment that is increasingly housed outside of traditional data centers. Dell has been making its hardware and related software optimized for the cloud and, increasingly the edge, and through Project Apex will offer most of its portfolio via an as-a-service consumption model.

The tight cooperation between the two will continue. According to a presentation to analysts, the two companies will continue joint work on such offerings as the VxRail hyperconverged infrastructure solution and VMware Cloud on Dell EMC and will collaborate on innovation in other areas, such as 5G, telecommunications and the edge. VMware products also will continue to be available through Dell channel partners.

In addition, Dell and VMware as part of the spinoff will have in place a five-year commercial agreement, with options to revisit it every year after that.

A key part of the plan is that the close working relationship between Dell and VMware, which has worked out well for both companies, will continue, Patrick Moorhead, principal analyst with Moor Insights and Strategy, told InternetNews. Not much will change for customers or channel partners, while there will be more flexibility for the two companies as they work with other vendors, Moorhead said.

“Even though both Dell and VMware were both working with each other's competitors, there will be a little bit more permission for, say, an HPE to get closer to VMware or maybe a Citrix to get closer to Dell or an Azure to get closer to Dell,” he said. “There's going to be this optics that, ‘Hey, we can partner more closely with both companies.’”

Five-Year Agreement

The five-year agreement is a key part of the strategy, the analyst said. The tight working relationship between Dell and VMware since the EMC acquisition has been good for both companies and the agreement will ensure that the situation continues.

The financial help it brings Dell also plays a significant role. If Wall Street firms had been more comfortable with the ownership situation between Dell and VMware, the spinoff may not be happening, Moorhead said.

“But the market just wasn't [comfortable],” he said. “They were concerned with governance and ownership, voting rights and stuff like that. … Dell was always undervalued, given that it included VMware, so shareholders and employees and 401Ks and stuff like that are going to get a much more fair assessment on the value of Dell Tech, and I do think that's positive.”

Investment firms’ reaction to the announcement illustrated that, with Dell’s stock jumping as much as 9 percent when the news broke. 

Shedding VMware wouldn’t be the only move Dell has made in its efforts to reduce its debt and improve its finances. In a report this week, Bloomberg, citing unnamed sources, said Dell also is considering selling its Boomi cloud business, which it has owned since 2010. Last year the company sold off the RSA Security business, which also came into the fold through the EMC deal, for $2.8 billion.

In addition, Dell – which had been taken private in 2013 through a $25 billion buyout by Michael Dell and private equity firm Silver Lake Partners – returned to the public stock market in 2018 in another move that proved a financial boon for the company.

According to the analyst presentation, after the EMC deal closed, Dell held $57.3 billion in debt. By the end of this year, that will be down to $48.5 billion.