Petya Petrova - Fotolia

Dell confirms a possible VMware spinoff

Dell fessed up that it is exploring options for spinning off VMware while assuring users that its relationship with the virtualization giant is solid.

After weeks of speculation, Dell Technologies confirmed reports that it is exploring a potential spinoff of VMware next year. Company officials said if it does so, it will continue to have a strategic relationship with VMware.

Hoping to assure VMware users, Dell chairman and CEO Michael Dell said in a prepared statement that "the strategic relationship between Dell Technologies and VMware has never been stronger." He added that despite the options being explored, the two companies will accelerate their current strategies, including jointly creating a number of integrated products.

Dell gained an 80% stake in VMware when it acquired EMC in 2015. EMC acquired VMware in 2004.

Possible Dell-VMware spinoff at least a year off

Dell also confirmed what analysts have said over the past few weeks: that any spinoff would not happen until September of 2021 so the company can sidestep the heavy federal taxes associated with the deal.

Dell said if it decides to follow through on a spinoff, it will agree to specific terms and conditions under the auspices of a special committee made up of the Board of Directors of VMware and Dell. Dell said it would also negotiate the payment of a special cash dividend by VMware to be paid on a pro rata basis to all VMware shareholders.

With its commanding position in virtualization and concentrated focus on hybrid clouds and containers, most analysts believe a spinoff provides VMware with more competitive advantage than it has with Dell, which is traditionally a hardware-oriented company. But some believe the economic advantages Dell would gain through a spinoff outweigh any strategic technology disadvantages. Wall Street doesn't like the capitalization structure between Dell and VMware, which investors believe has held down the market value of Dell.

"The crazy thing is, Dell has a market worth of around $30-something billion, but they own 81% of VMware, which should make their value about $50 billion," said Patrick Moorhead, president and principal analyst at Moor Insights and Strategy. "It almost forces [Dell's] hand to sell VMware," he said.

While many IT market analysts favored VMware, investors were encouraged by Dell's confirmation of a potential spinoff sending the company's stock up 17% the day of the announcement on Thursday.

Even with the financial upside to a spinoff, Dell would still need to find another software partner, or multiple software partners, to replace VMware, Moorhead said, which could prove difficult.

"They certainly aren't going to go out and buy another company because the capitalization doesn't work out there," Moorhead said. "The other route is to do what HP did and pull together various pieces and build their own stack, but I don't see them pulling that off."

Another analyst believes Dell, in part, is exploring a spinoff is to gain more freedom to cozy up to other top-tier cloud providers.

"The only possible reason [Dell] would float this out there is because of two possible suitors; namely Google and Amazon," said Dana Gardner, principal analyst at Interarbor Solutions, LLC. "Those two would like the chance to take that installed VMware base across, but neither one of them would see Dell as that strategic."

Dig Deeper on VMware cloud

Virtual Desktop
Data Center
Cloud Computing