Why Did Dell Spin-Off VMware?

The Chairman and chief executive officer of Dell Technologies, Michael Dell, will continue to remain the chairman of the VMware board.

Dell Technologies has announced the planned spin-off of its 81% equity ownership in VMware. The deal is expected to close this year.

The companies will enter into a commercial agreement to co-develop critical solutions and align sales and marketing activities. VMware will continue to use Dell Financial Services.

Long pending divestment

Dell acquired VMware in 2015 in a massive deal worth $58 billion as part of the EMC acquisition (until then, EMC owned VMware).

The news of Dell hiving off VMware did not come as a big surprise. Dell had confirmed the same in 2020. Over time, VMware has emerged as the de-facto virtualisation platform to the point it started overshadowing Dell. Compared to the previous year, VMware’s business was up by 22 percent in 2020 ( as of June 2020). Considering the market standing of VMware, experts believe Dell’s decision could not have come at a better time.

VMware will distribute a cash dividend of $11.5 – $12 billion to all VMware shareholders, including Dell Technologies. Since Dell owns 81 percent of shares, up to $9.7 billion will go to Dell’s coffers.

“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware and unlock significant value for stakeholders. Both companies will remain important partners, with a differentiated advantage in how we bring solutions to customers,” Dell CEO Michael Dell said in a statement.

“Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers. At the same time, Dell Technologies will continue to modernise its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom,” he further added.

The spin-off will simplify the capital structure, making it easier for both companies to raise capital at the lowest cost. The companies are also expected to get an investment-grade credit rating. 

Dell Technologies provides the go-to-market scale for VMware’s product portfolio. The Chairman and CEO of Dell Technologies, Michael Dell, will continue to remain the chairman of the VMware board. The VMware board of directors will also remain unchanged.

What are the implications?

Dell will continue to work closely with VMware to drive innovation and generate new growth opportunities through an open ecosystem. As per reports, there is a formalised governance process to achieve commercial goals, reiterating the commitment of the two companies to work together for at least the next five years.

Dell Technologies is speculated to use the money towards infrastructure and PC spend, developing models driving XaaS growth, moving to edge computing and other digital transformation initiatives. Moving ahead, Dell Technologies will be focusing on the following areas:

  • Strengthening the company’s leading position in the infrastructure and client markets.
  • Expanding to emerging and high-growth markets such as hybrid cloud, edge, and data management.
  • Moving towards cloud operating and consumption models.

The $9.7 billion will help Dell retire part of its debt.

Notably, Dell sold RSA Security last year. The former acquired the security company in 2015 as part of its acquisition of EMC. RSA was not aligned with Dell’s approach to security, and its sale was expected to simplify Dell’s business and product portfolio.

Speculations are rife that Dell might now sell its cloud platform-as-a-service company Boomi for up to $3 billion. Dell had acquired Boomi for an undisclosed amount in 2010.

As for VMware, industry watchers believe Dell will continue to be its preferred infrastructure provider, and VMware will still be Dell’s go-to solution platform.

This year, VMware had acquired cloud-based application security startup Mesh7 to boost its Kubernetes, microservices, and cloud-native services.

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Shraddha Goled
I am a technology journalist with AIM. I write stories focused on the AI landscape in India and around the world with a special interest in analysing its long term impact on individuals and societies. Reach out to me at shraddha.goled@analyticsindiamag.com.

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