Michael Dell, Chairman and CEO of Dell at 2015 WEF in Davos, Switzerland.
David A. Grogan | CNBC
Dell shares rose 9% on Wednesday with extensive trading after the company announced its plan to continue owning 81% of enterprise software maker VMware. The deal should close in the fourth quarter of 2021.
The move is not a surprise. Dell is continuing a process it has long considered a way to pay off its debts.
VMware will jointly distribute a cash dividend worth $ 11.5 billion to $ 12 billion to shareholders, including Dell, Dell said in a statement. Dell will receive $ 9.3 billion to $ 9.7 billion, which would place it well for investment grade ratings, the company said. Dell currently has a BB + credit rating from S&P Global, which according to S&P Capital IQ gives a speculative rating.
Following the transaction, Dell shareholders will receive 0.44 shares of VMware shares for each Dell share, although the ratio may vary. VMware shares will acquire a single-class structure after the transaction, as VMware Class B shares become Class A shares. Dell and VMware will continue a commercial relationship.
“We felt it was beneficial to our shareholders because it eliminates a dual-class share structure, and it enables us to work in an expanded ecosystem,” VMware CFO Zane Rowe said in an interview. .
Last year, Dell said it wants to consider a spin-off and that any transaction will not take place before September 2021. CNBC reported last year that Silver Lake and other Dell shareholders supported the idea, in part for tax reasons.
Dell incurred significant debt through the acquisition of EMC, which acquired VMware in 2004, and later offered a small stake in the company in an initial public offering.
“After a comprehensive review of potential strategic options, both parties have determined that this transaction will simplify capital structures and create additional long-term business value,” Dell said.
Pat Gelsinger, who continued to run VMware through the Dell acquisition, left VMware to run Intel, where he had previously been a top executive. VMware shares rose 1% after the announcement on Wednesday.
VMware has been somewhat forced to partner with other companies due to the large ownership of Dell. Working as an independent company will provide VMware with ‘more opportunities to have more partnerships with different companies’, Rowe said.
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