Dell Technologies to spin off its ownership stake in VMWare
New York(CNN Business) After months-long negotiations, Dell Technologies announced Wednesday it plans to spin off its 81% ownership stake in VMWare.
The move will create two separate companies and generate around $9 billion in proceeds for Dell. Dell (DELL) said in a statement that the two firms will maintain their "mutually beneficial strategic relationship and continue to co-engineer solutions for customers."
The news sent Dell's stock soaring as much as 9% in after-hours trading.
"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 CEO Michael Dell said in a statement. "Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers."
VMWare (VMW), the cloud computing and virtualization software firm that allows businesses to run various operating systems on their devices, first joined Dell Technologies in 2015 as part of its blockbuster $67 billion acquisition of corporate software, storage and security giant EMC. The deal was crucial for Dell at the time, as the company was struggling to keep up with new trends and competitors in its core PC and server businesses.
However, growth in demand for hardware tech products during the pandemic has been a boost to Dell's business — a trend that analysts expect will continue as the economy recovers. Dell reported record full-year revenue of $94.2 billion last year, and its stock is up more than 83% since the start of 2020.
In July, Dell said it would begin exploring a spin-off of VMWare.
The spin-off agreement comes shortly after VMWare lost its CEO, Pat Gelsinger, to Intel (INTC) in February. Zane Rowe, who has been serving as the company's interim CEO since then, will remain in that role following the spin-off. Michael Dell will remain chairman and CEO of Dell, as well as chair of the VMWare board.
As part of the deal, VMWare will distribute a special cash dividend of between $11.5 billion to $12 billion to all VMware shareholders. From that dividend, Dell will receive approximately $9.3 billion to $9.7 billion, which it will use to pay down debt and improve its credit profile.
The spin-off is expected to simplify capital structures for both companies, and the transaction will provide the two firms "additional strategic and financial flexibility," Dell CFO Tom Sweet said on an investor call Wednesday. Ratings companies Fitch and S&P both had Dell at BB+ ratings as of mid-February.
The spin-off could be a bold move, given that VMWare's revenue has grown faster than that of the overall Dell Technologies business in recent years.
However, "the market does not appear to appreciate a hardware-software combination," CEO Michael Dell said on the call, adding that the spin-off will allow each company to focus on their own biggest potential growth areas.
The two companies plan to enter into a commercial agreement designed to preserve their joint innovation, product development and marketing activities. Sweet said the companies have agreed on a framework to identify new areas for joint innovation such as 5G, telecom and edge computing. The "broad, long term partnership" will initially last five years, with the opportunity to extend annually beyond that, Sweet said.
"Dell and VMWare are better together, and will be important partners, continuing to innovate for customers as we move forward," Sweet said.
The transaction is expected to close during the fourth quarter of 2021.
