As a tech industry analyst, I’m always skeptical when someone tells me that “everyone wins” or “there are no downsides” to anything. Whether it be a tech product or corporate strategy, part of my job is to find the positives and the negatives of everything. It’s unsatisfying not to find a blemish or two with anything. After listening to Dell Tech and VMware calls yesterday, reading through many things that have been written, and talking directly to Michael Dell this morning, it’s hard to find anything wrong with Dell Tech’s spin-off of VMware.
What was announced
Per Dell Tech and VMware press releases, presentations, and calls:
- Dell Tech will spin-off its 81% equity ownership of VMware, forming two standalone public companies
- VMware will distribute a special cash dividend of $11.5 – $12B to all VMware shareholders, including Dell Tech
- Removal of dual-class VMware stock structure converting Class B with 10 votes/share into Class A with 1 vote/share on 1:1 basis with no premium; will make VMware eligible for indices (e.g., S&P 500)
- Dell Tech and VMware agreed to a 5-year commercial agreement, with optional annual extensions that “preserves and enhances their strategic partnership to deliver joint customer value” using “Dell go-to-market scale, VMware software innovation and collaboration on solutions.” Specifically, Dell will continue to sell VMware’s product portfolio, and the two will continue to collaborate on VxRail, VMware Cloud on Dell EMC, VeloCloud SD-WAN, Digital Workspace, and security. The companies agreed to work together on additional joint innovation areas, including edge and telco, and VMware will continue to leverage mutually beneficial programs like DFS.
- Both companies believe the transaction drives additional growth opportunities
- Expected to close Q4 2021
- Michael Dell will be chairman of both Dell Technologies and VMware
What it all means
To Dell Tech and VMware customers and channel partners, not much, if anything, will be changing anytime soon. For at least five years, the two companies will be in a nearly identical relationship as they were before the spin-off.
I would characterize it that Dell Tech will still be VMware’s preferred infrastructure platform and go-to-market platform, and I believe VMware will still be Dell Tech’s preferred software and solution platform. Everyone needs to understand that both Dell Tech and VMware benefit from each other’s relationship that has spanned nearly five years. Dell Tech CFO Tom Sweet reiterated on its call yesterday that “Dell channel sales represented 35% of VMware’s fiscal ’21 revenue”. The two companies need each other, and with need comes alignment.
If the companies get misaligned or outgrow each other, then things may be different. Heck, we will likely land humans on Mars in five years. Tech changes fast, and so do relationships. Don’t forget, Michael Dell will still be chairman of both Dell Tech and VMware, which counts for a lot in my book. Sure, under the spin-out, Michael Dell and Silver Lake don’t have as much voting power, but they’re both majority owners.
Interestingly when Dell filed the 13D back in July, Dell Tech was was hyper focused on how customers would view this. It turns out they didn’t care about the corporate ownership structure which gave the company more confidence in its path. Almost no questions about it from customers and they mostly wanted to know that Dell Tech and VMware would continue to be great partners and work well together. They also like that the two companies will be connected by one chairman who is also by far the largest shareholder in both.
Both companies used the line “additional growth opportunities” without a lot of detail. Zane Rowe, VMware CFO, and interim CEO said, “We will have an enhanced ability to extend our ecosystem across all cloud vendors and on-premises infrastructure vendors and a capital structure that will support growth opportunities.” So, VMware already partners with all the public cloud players and all the infrastructure platform players, so what could Rowe be indicating? For example, I think enterprises might like to see an HPE plus VMware VxRail kind of infrastructure product. I could see closer alignment between Dell Tech and, let’s say, Google Anthos. As I said to many of my press contacts this week, I think the deal’s optics make it easier for Dell Tech competitors to work with VMware now and VMware competitors to work with Dell Tech. It’s a subtle but important point, and I hear it every day in my conversations with tech company executives.
The net net is that I, too, see more significant opportunity for the customers and channels with Dell Tech and VMware as two separate companies as long as the two keep collaborating. I believe APEX will be huge for Dell Tech, and I think VMware will have big success in the cloud now that we’re all focused on the hybrid cloud and not pretending everything will magically be hosted in the public cloud. I can’t wait to see who the VMware board chooses as its next CEO. I think current COO Sanjay Poonen would make a fine choice.
The final point I wanted to bring up is the easiest concept yet the hardest to explain- the value to shareholders. I will leave the finance-babble to the experts. I am a tech industry analyst, not a financial analyst, but as an often contributor on CNBC and investor (non-tech), I have to keep up with Wall Street machinations.
Net-net, I believe Wall Street will like the spin-out as it:
- greatly simplifies the corporate ownership structure and governance model, which provides greater flexibility and focus on making big decisions like M&A
- positions Dell Tech well for investment grade ratings post spin with over $14B of FY22 committed debt pay down including ~$9.5B from the spin-out special dividend. VMware is expected to maintain investment grade ratings.
- greatly reduces the parent subsidiary and leverage discounts in Dell Tech’s stock price which could double based on trailing twelve month EBITDA multiples vs peers.
- positions both companies for growth
So, what are the Wall Street “experts” saying? Deutsche Bank, JPMorgan, and Morgan Stanley all raised their targets for Dell Tech. Dell rose $6.22 (+6.71%) to close today at $98.92. VMware got a raise at Piper Sandler, downgrade by Northland Capital, and a push by BMO Capital markets. VMware rose $4.57 (+2.95%) to close today at $160.08.
I think this is a good, first sign, but as I’ve always said, Wall Street is more about the here and now versus the future, and I believe both companies have a brighter one. If I look at the TTM EBITDA comps for Dell Tech, today’s closing price appears to be way out of whack. It’ll be up to Dell Tech and the now independent VMware to prove everyone wrong.
Note: Moor Insights & Strategy writers and editors may have contributed to this article.