Dell considers VMware spin-off to boost share price

Dell Technologies is considering a spin-off of its near-$50bn stake in VMware, a data centre software company widely considered its most attractive asset, in a bid to overcome a hefty stock market discount on its business.

The technology company, founded by Michael Dell, announced plans on Wednesday to sell its 81 per cent stake in VMware, the cloud computing business it acquired when it bought data storage maker EMC for about $63bn in 2016.

By exploring a sale of VMware, Dell is attempting to address a valuation shortfall that has plagued the company for years. With the value of its publicly traded VMware stake worth $47bn before Wednesday’s announcement, the group’s entire enterprise value of $83bn implied a value of just $36bn for the rest of the business, even though its sales last year topped $90bn. 

Dell said the spin-off would not occur before September 2021, which is the earliest the company can offload its stake tax free. 

The Texas-based company returned to the stock market in 2018, five years after it was taken private by Mr Dell and private equity firm Silver Lake. It received a hostile reception from investors and, to the frustration of large shareholders like Elliott Management and GIC, Singapore’s sovereign wealth fund, its share price has lagged its competitors. 

The shares have risen 25 per cent since the listing, compared with a 60 per cent increase in the tech-heavy Nasdaq Composite and a 34 per cent rise in the S&P 500.

A spin-off would mark a notable about-turn after Dell’s insistence that retaining majority control of VMware was an essential part of its efforts to build a broad IT group for the cloud computing era. VMware’s software is used in automating data centres, complementing Dell’s lower-margin hardware like servers and storage.

The attempt to retain control of VMware forced Dell into some convoluted financial engineering. To overcome a funding gap in its purchase of EMC, Dell issued a second new class of VMware stock that theoretically tracked part of its holding in the software business, though there was no formal connection between the two. 

The tracking stock traded at a hefty discount before finally being bought back two years later, after a bruising fight with investors who claimed that Dell was underpaying.

Dell also considered spinning off VMware two years ago, before opting instead to return to Wall Street with a public listing despite Mr Dell’s complaints about Wall Street’s obsession with quarterly results. A dual-class share structure has left him with about 48 per cent of the voting power, compared to only 13 per cent of the votes before taking the company private.

On Wednesday, Dell claimed that it would be able to maintain its close relationship with VMware even after shedding direct ownership. 

In a statement, the company said it would set up “mutually beneficial commercial arrangements similar to those currently in place” including “go-to-market, services, research and development, and intellectual property agreements” between the two companies.