Dell announced this afternoon that it is removing VMware, a move that has been suspected for some time. Dell acquired VMware as part of the $ 58 billion massive EMC acquisition (announced as $ 67 billion) in 2015.
The way the deal works is that Dell plans to offer VMware shareholders a special dividend of between $ 11.5 and 12 billion. As Dell owns about 81% of the shares that would run between $ 9.3 and $ 9.7 billion when the deal closes later this year.
‘By eliminating VMware, we expect to promote additional growth opportunities for Dell Technologies as well as VMware, and unlock significant stakeholder value. “Both companies will remain key partners, with a distinct advantage in the way we provide solutions to customers,” said CEO Michael Dell in a statement.
Although there is a fair amount of CEO in the statement, it seems that the move is mostly administrative as the companies will continue to work closely together even after the deal is official. Dell will remain chairman of both companies.
In a submission to investors, the companies indicated that the plan to work together is more than lip service. There is a five-year trade agreement that is planned to be traded again every year thereafter. In addition, there is a plan to sell VMware products through Dell’s sales team and that VMware will be able to continue with Dell Financial Services. Finally, there is a formalized management process in place related to achieving the commercial objectives under the agreement, so it is fairly certain that these companies will continue to work closely together for at least another five years.
VMware, in turn, said in a separate statement that the agreement would allow it greater freedom to execute its strategy, a simplified capital structure and governance model and additional strategic, operational and financial flexibility, while strengthening the strategy. of the two companies are retained. partnership. ”
Dell shares rose more than 8% with the announcement. The company plans to use portions of its proceeds to borrow, writing in a statement that it will “use net proceeds to pay off debt, which will position the company well for investment grades.” This means that Dell will lower its net debt position and, it hopes, gain a stronger credit rating that will limit its future borrowing costs.
Even when it was part of EMC, VMware had a special status in that it functioned as a separate entity with its own executive team, the board of directors and that the share was also sold separately.
The agreement is expected to close by the end of this year, but it must first remove a number of regulatory barriers. This includes obtaining a favorable ruling from the IRS that the agreement is eligible for a tax-free spin-off, which could be a significant obstacle to an agreement such as this.
The deal is not a surprise. The company was open about its intention to sharpen its broader corporate structure. And with Dell inflated in debt terms and perhaps even in the scope of the product, the VMware transaction can be an intelligent way. Dell investors are more excited about the deal than VMware shareholders, with the latter company’s share up 1.4%.
VMware’s most recent revenue release states that it had $ 4.715 billion in ‘total cash, cash equivalents and short-term investments’. Perhaps its shareholders are not excited about the prospect of delivering VMware’s balance sheet to help Dell.