In a bid to provide more value to shareholders, Dell Technologies Inc., the American PC maker giant, is considering a potential spin-off its 81% of its stake in cloud-based computing software maker VMware.
Dell added that the proposed spin-off talks will not happen before the 3rd calendar quarter (September) of 2021 when such deals would become tax-free under US Tax law.
The deal, worth USD 47 billion at the current price to VMware shareholders will help in establishing a clearer market value for both Dell as well as for VMware stock. It will also simplify each company’s capital structure.
Dell also said that in the case of the spin-off, it will negotiate payment of cash dividend by VMware to all shareholders and would formalize commercial arrangements like existing intellectual property agreement.
The spin-off would also help Dell in reducing its debt of USD 57.3 billion, as it would get a pro-rated portion of special dividend most of which was taken during VMware’s then majority owner EMC back in 2016. VMware has also formed a special committee with a corporate computing giant for spinoff talks.
Any such deal would require approval from VMware shareholders. According to sources, other options such as outright sale and maintaining the status quo are likely to be considered.
Presently, Dell’s best performing unit VMware benefits from companies that are looking to cut costs and moving ahead with cloud services, a pattern being accelerated since the coronavirus pandemic.
In aftermarket trading, the share price of Dell and VMware jumped to 8% and 5% respectively.
Last year, VMware brought two providers of cloud security and developer services in the total value of $5 billion. Even as Dell’s total revenue growth dropped in the latest reported quarter, VMware’s revenue was up by 12%.