When Dell announced it turned out VMware yesterday, the move itself was not surprising; there has been some speculation in the public eye for some time. But Dell could have done so in a number of ways in this deal, despite its choice to point out VMware as a separate company with a compounding dividend instead of a direct sale.
The dividend route, which involves a payment to shareholders between $ 11.5 billion and $ 12 billion, has the benefit of being tax-free (or at least that’s what Dell hopes if it requests it from the IRS). For Dell, which owns 81% of VMware, the dividend translates to somewhere between $ 9.3 billion and $ 9.7 billion in cash, which the company plans to use to recover a portion of the huge debt it still has from EMC -purchase of $ 58 billion in 2016, repayable. .
Dell hopes to get it and eat it too with this deal: it generates a large amount of cash that can be used for personal debt relief, while obtaining a five-year commercial deal that the two companies must keep close.
VMware was the crown jewel in the deal, giving Dell the cloud it lacked before the deal. For context, VMware popularized the concept of virtual machine, a concept that led to the development of cloud computing as we know it today. It has since expanded much wider and it has given Dell a solid foothold in the cloud native computers.
Dell hopes to get it and eat it too with this deal: it generates a large amount of cash that can be used for personal debt relief, while obtaining a five-year commercial deal that the two companies must keep close. Dell CEO Michael Dell will continue to chair the VMware board, which will help ease the relationship after the turnaround.
But could Dell have withdrawn more cash from the deal?
Do what’s best for everyone
Patrick Moorhead, chief analyst at Moor Insights and Strategies, says the out-of-cash transaction provides a way for companies to continue to work closely with the least disruption.
‘Ultimately, this step is more about the maximum price of Dell and VMware [in a way that] has no impact on customers, ISVs or the channel. Wall Street does not value the two companies nearly as much [strongly] because I believe it will be as separate entities, ”Moorhead said.