Dell Technologies, one of the largest manufacturers of devices in the world (computers, servers, and storage equipment), has confirmed that it is ditching the cloud computing software manufacturer VMware, which it controls approximately 81%, to reduce its $ 41,620 million in debt (34.782 Million euros), assumed much of that with the 2016 acquisition of data management company EMC, for $ 58,000 million, and the improvement of its stock market valuation.
With this deal, VMware will distribute cash dividends ranging between $ 11.5 billion and $ 12 billion to all of its shareholders, including Dell, who will receive between $ 9.3 billion and $ 9.7 billion (between 7.772 s 8106 million euros), In a transaction that is expected to be tax exempt. The deal is expected to close during the fourth quarter of 2021.
Dell is confident that the deal will streamline the capital structures of both companies and create additional long-term business value for each of them. The company said yesterday that the single offer, which was first proposed in a presentation last July, will result in two independent companies in a position to “grow in the data age”.
VMware is currently Dell’s best-performing unit and has benefited from companies looking to cut costs and move to the cloud, a trend accelerated by the Covid-19 pandemic, according to Reuters reports.
Following the decision, Dell shares rose more than 8.4% in post-close trade, while VMware shares rose 1.5%. “With VMware spin-off, we hope to create additional growth opportunities for Dell as well as VMware and unleash significant value for parties,” said Michael Dell, President and CEO of Dell Technologies, who will continue to serve as president of both companies. .
The executive added that the two companies will continue to be an important partner, “giving Dell a distinct advantage in the way we provide solutions to customers.” He indicated that they will take advantage of new opportunities “through an ecosystem open to growth in the hybrid and private cloud, the ocean.” [edge computing] And communications. “
Under the agreement, the two companies would continue to operate without major changes for at least five years. For example, Dell will continue to sell VMware products, and VMware will continue to use Dell Financial Services to help its clients fund their digital transformation projects. The sealed trade agreement can be revised every year after that.
Some analysts believe the move will provide Dell with a stronger capital structure in which it can benefit more from the sudden rise in spending on infrastructure and computers after the pandemic accelerated the digitization of companies.
VMware’s interim CEO Zane Rowe confirmed to Reuters that VMware will use $ 2.5 billion to $ 3 billion in cash from its balance sheet to pay dividends and finance the rest with debt. Roe said VMware expects an investment grade credit rating after the deal.
The single offer, praised by Elliott Management Investment, a major Dell shareholder, may allow VMware to forge more partnerships with major cloud computing providers, including Amazon and Microsoft, who are also Dell’s competitors. “Obviously, this will give us a great deal of strategic flexibility to make more partnerships,” Roe acknowledged.
Upon completion of the transaction, Dell shareholders will receive approximately 0.44 VMware shares for every Dell share they own. VMware will move from a multi-class sharing architecture to one, while Dell’s share structure will remain the same. Michael Dell and his financial partner, Silver Lake Partners, currently own a 60% stake in Dell Technologies.
VMware became part of Dell when it acquired EMC in 2016. The company bought Virtualisation Specialist three years ago for $ 635 million.