Why Is Dell So Interested in VMware?



Dell’s highly leveraged balance sheet would get a breather by merging with VMware

Earlier in the series, we discussed Dell’s recent move to merge with VMware (VMW). Dell has approximately $42 billion in debt on its books. Its acquisition of EMC marked the largest financing commitment for a technology deal.

VMware has a market cap of ~$55 billion to $56 billion with $11.6 billion in cash, cash equivalents, and short-term investments and $3 billion in annual FCF (free cash flow). It has only $4.2 billion in debt on its books. VMware is a leading player in the virtualization space and has entered a strategic acquisition with Amazon (AMZN) and IBM (IBM), which feature among the top five players in the cloud space. As the below presentation shows, VMware’s vSAN is the most deployed HCI (hyper-converged infrastructure) solution, one of the fastest-growing markets in the global converged systems space. VMware targets the HCI space through vSAN and VxRail software offerings. VMware’s unique position gives investors and the general public a fair idea as to why Dell is so eager for a merger with VMware or a higher ownership stake in the subsidiary.

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Investors prefer reverse merger of Dell-VMware

According to Barron’s, one tracker investor who refused to be identified said that the tracker investors prefer a combination of VMware, Dell, and the tracking stock and not just involving Dell and the tracker.

They would prefer a reverse merger under which VMware issues stock to Dell, which would make the latter a public company, and then retires the tracking stock in the process. With Dell holding an 82% stake in VMware through Dell tracking stock (or DVMT), the public has an 18% share in VMware.

VMware’s investors and shareholders would prefer some premium above the current share price of $138 as an incentive to ensure their participation. Considering Dell’s interest in VMware, it’s likely that the company would agree to offer VMware shareholders a vote on any arrangement.


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