Michael Dell, President and CEO of Dell at the 2015 WEF in Davos, Switzerland.
David A. Grogan | CNBC
Shares of Dell rose to 9% in extended transactions on Wednesday, after the company announced plans to continue with the 81% ownership of the enterprise software maker VMware. The agreement is expected to be concluded in the fourth quarter of 2021.
The move is not a surprise. Dell is moving forward with a process it has long considered a means of paying off its debts.
VMware will collectively distribute a $ 11.5 billion to $ 12 billion cash dividend to shareholders, including Dell, Dell said in a statement. Dell will receive $ 9.3 billion to $ 9.7 billion, which will position it well for investment ratings, the company said. Dell currently has a BB + credit rating from S&P Global, giving the company a speculative rating, according to S&P Capital IQ.
Upon completion of the transaction, Dell shareholders will receive 0.44 shares of VMware shares for each Dell share, although the ratio may vary. VMware shares will take on a single class structure after the transaction, as VMware Class B shares become Class A shares. Dell and VMware will continue a business relationship.
“We felt this was beneficial to our shareholders, as it eliminates a dual-class shareholding structure and allows us to operate in an expanded ecosystem,” Zane Rowe, VMware’s chief financial officer, said in an interview.
Last year, Dell said it was considering a spinoff and that no transaction would take place until September 2021. CNBC reported last year that Silver Lake and other Dell shareholders supported the idea, in part for tax reasons.
Dell assumed considerable debt through the 2016 acquisition of data storage hardware manufacturer EMC, which acquired VMware in 2004 and subsequently placed a small stake in the company in an initial public offering.
“After a comprehensive analysis of potential strategic options, both sides have determined that this transaction will simplify capital structures and create additional business value in the long run,” Dell said.
Pat Gelsinger, who had continued to run VMware through the acquisition of Dell, left VMware in February to lead Intel, where he had previously been a top executive. Shares of VMware rose 1% more after Wednesday’s announcement.
VMware was somewhat forced to work with other companies due to Dell’s large ownership. Operating as an independent company will give VMware “more opportunities to have multiple partnerships with different companies,” Rowe said.
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