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Dell EMC storage IPO, VMware merger plans still unclear

Dell Technologies World 2018 has come and gone with hardly a mention of the corporate reorganization Michael Dell and his team is considering as the next step after Dell’s $60 billion-plus 2017 acquisition of storage giant EMC.

Dell has been weighing a return to public ownership as part of strategy to pay down a mountain of debt related to the merger with EMC .  A potential reverse merger with its VMware subsidiary is one option Dell is considering, along with a possible spinoff of the Dell EMC storage division as a public company.

But Dell chairman and CEO Michael Dell stuck to technology during his Monday keynote address kicking off the conference. He also sidestepped questions about the issue during a media briefing following his keynote, suggesting any interested parties should read the SEC filing the company made listing its options.

“Have you read our Form 13D (securities filing)?” Dell responded to a question from one reporter. “If you haven’t read it, I suggest you read it in full. It contains everything we’ve said on the matter. We filed it because we publicly said we were thinking about some things. If I say anything else about it, we’ll have to make another filing.”

The coals of Dell’s post-merger considerations are being stoked by roughly $46 billion of debt related to the EMC transaction. Getting a handle on the debt service was an immediate concern when Dell and EMC storage fused into a single company. Analysts and industry observers have predicted from the outset that Dell would have to lop off business segments that no longer fit its long-range goals, including services and software.

In the Jan. 31 filing with the U.S. Securities and Exchange Commission, actually made by publicly traded VMware, Dell Technologies referred to several options under review.  One option involves Dell EMC storage pursuing an initial public offering (IPO) of stock. That would mark a sharp departure from the origins of the EMC deal.

Taking Dell EMC storage public likely would net much larger proceeds than the $555 million from Dell subsidiary Pivotal Software’s recent IPO.  At the time it acquired EMC, Dell touted the fact the deal would shield the storage business from the scrutiny of Wall Street.

Since the merger, Dell EMC storage revenue has sagged, with Dell Technologies claiming the lion’s share of revenue from sales of traditional servers and networking gear. Would investors get behind an EMC IPO, considering the industrywide decline in externally networked storage sales? That an open question and one undoubtedly getting batted around during Dell’s executive deliberations.

A reverse merger with VMware would shift the Dell EMC debt to the virtualization vendor’s books. That would entail Dell, which owns 81% of VMware, to be the acquired by its much smaller subsidiary. VMware could absorb the debt by selling additional shares to amortize the cost, but shareholders might balk if they perceive such a decision will dilute the value of VMware holdings.

“It’s not a guarantee that activist investors won’t jump in. But there is so much cash being generated by VMware (it could make sense) as a way of shuffling that paper debt around,” said Greg Schulz, senior advisory analyst at consulting firm Server and Storage IO, based in Stillwater, Minn.

Then again, it’s entirely possible that no changes lay ahead for VMware or Dell EMC storage. Listed among the various options on Dell’s securities filing is “maintaining the status quo.”  Most industry observers, in fact, say they would be surprised if Dell made any substantive  change to its corporate structure.

For now, though, Dell’s flight path toward a decision appears to be stuck in an indefinite holding pattern, searching for a runway and soft landing.

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