Close to a year after confirming it was considering spinning off its 81 per cent stake in VMware, Dell Technologies has flagged its decision to plough ahead with the move, expecting the spin-off to be finalised by the fourth quarter of this calendar year.
In July last year, Dell Technologies said that although its exploration of a VMware spin-off was, at the time, in an early stage, it believed a spin-off could benefit both Dell Technologies and VMware shareholders.
Now, after a comprehensive review of potential strategic options, both parties have determined that such a transaction would simplify capital structures and create additional long-term enterprise value for each.
Dell Technologies said that the proposed transaction to spin off its 80.6 per cent equity ownership of the virtualisation vendor would result in two standalone companies “positioned for growth in the data era”.
Upon completion of the spin-off, Michael Dell will remain chairman and chief executive officer of Dell Technologies, as well as chairman of the VMware board. Zane Rowe, meanwhile, will remain interim CEO of VMware, and the VMware board of directors will remain unchanged, Dell Technologies said.
Rowe, VMware's CFO, took the CEO reins on an interim basis after former CEO Pat Gelsinger departed to run Intel as its new CEO.
It is hoped the spin-off will provide VMware with increased freedom to execute its stated vision and strategy to create a “ubiquitous software and SaaS [software-as-a-service] platform across all clouds and hardware”.
At the same time, it is anticipated the move will deliver Dell Technologies a stronger capital structure with which to further capitalise on the post-COVID-19 rebound in infrastructure and PC spend, along with new cloud operating models driving as-a-service (aaS) growth, compute moving to the edge and customers’ longer-term digital transformation initiatives.
“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders," Dell said. “Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers.
“At the same time, Dell Technologies will continue to modernise its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom,” he added.
The deal will see Dell Technologies and VMware enter into a commercial agreement designed to preserve each company’s unique and differentiated approaches to the co-development of critical solutions and alignment on sales and marketing activities.
Moreover, VMware will continue to use Dell Financial Services to help its customers finance their digital transformations.
Dell Technologies said that, with a “strong” commercial agreement in place, it would 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.
Post-spin-off, Dell Technologies plans to further focus on strengthening its leadership position in growing technology infrastructure and client markets and expand into new growth areas of hybrid cloud, edge, 5G, telecom and data management.
Additionally, the spin-off is expected to provide VMware with the increased strategic, operational and financial flexibility and agility to drive its growth strategy.
At the transaction’s closing, VMware will distribute a special cash dividend of US$11.5-US$12 billion to all VMware shareholders, including Dell Technologies.
Based on Dell Technologies’ current 80.6 per cent ownership in VMware, Dell Technologies would receive approximately US$9.3-US$9.7 billion and intends to use the net proceeds to pay down debt.
Further, upon completion, Dell Technologies shareholders would receive approximately 0.44 shares of VMware for each share of Dell Technologies that they hold, based on shares outstanding at the time of writing.
VMware will shift from a multiclass to a single class share structure while Dell Technologies’ share structure remains the same.
While the transaction is expected to close during the fourth quarter of the 2021 calendar year, it remains subject to certain conditions.