Michael Dell, Chairman and CEO of Dell at the WEF 2015 in Davos, Switzerland.
David A. Grogan | CNBC
Dell shares rose up to 9% in expanded trading on Wednesday after the company announced it would continue to spin off its 81% stake in enterprise software maker VMware. The deal is expected to close in the fourth quarter of 2021.
The move is not a surprise. Dell is advancing a process it has long viewed as a means of paying off its debt.
VMware will collectively distribute a cash dividend of between $ 11.5 billion and $ 12 billion to shareholders, including Dell, Dell said in a statement. Dell will receive $ 9.3 billion to $ 9.7 billion, which will position it well for investment grade ratings, the company said. Dell currently has a BB + rating from S&P Global, which gives the company a speculative note, according to S&P Capital IQ.
When the deal is complete, Dell shareholders will receive 0.44 VMware shares for each Dell share, although the ratio can vary. VMware shares will adopt a single class structure after the deal as VMware Class B shares become Class A shares. Dell and VMware will continue their business relationship.
“We felt this was beneficial to our shareholders as it eliminates a two-tier stock structure and enables us to operate in an expanded ecosystem,” said Zane Rowe, VMware’s chief financial officer, in an interview.
Last year Dell said it was considering a spin-off and that a deal wouldn’t happen until September 2021. CNBC reported last year that Silver Lake and other Dell shareholders backed the idea in part for tax reasons.
Dell took on significant debt by acquiring data storage hardware maker EMC in 2016, which acquired VMware in 2004 and later took a small stake in the company through an IPO.
“After a thorough review of possible strategic options, both parties determined that this transaction will simplify capital structures and create additional long-term business value,” said Dell.
Pat Gelsinger, who continued to operate VMware as part of the Dell acquisition, left VMware in February to head Intel where he had previously been an executive. VMware shares rose 1% after Wednesday’s announcement.
VMware was somewhat forced to work with other companies because of Dell’s vast ownership. Working as an independent company gives VMware “more opportunities to partner more with different companies,” said Rowe.
CLOCK: Dell CEO: The year ahead will be another very strong one