What happened
Actions of Dell (NYSE: DELL) have soared today, up 14% from 12:10 pm EDT, after the company announced last night that it was exploring the idea of selling its majority stake to a virtualization specialist. VMWare (NYSE: VMW). A possible divestment could unlock great value for Dell shareholders.
And that
In recent months, rumors have circulated that Dell has been mulling over what to do with its 81% stake in VMWare, with possible results including a spin-off or the purchase of the remaining 19% of the company. Dell is now exploring the above option while pointing out that it could simply choose to maintain its current ownership interest in VMWare.
Image source: Dell.
Dell emphasizes that it would still want to maintain a mutually beneficial business relationship with VMWare in the event of a spin-off. A divestment could help simplify the capital structures of both companies while creating substantial business value. Another objective would be to maintain VMWare’s investment grade credit rating while upgrading Dell’s credit rating to investment grade territory. MoodyIt has been said today that a possible spin-off would increase uncertainty for both companies.
Now what
Incredibly, the value of Dell’s stake in VMWare ($ 48 billion) is greater than Dell’s total market capitalization ($ 44 billion), even after today’s jump. In other words, the market is effectively assigning a negative value to Dell’s actual operations of selling PCs and other computer hardware. Dell was the No. 3 provider of PCs in the second quarter, according to IDC.
If Dell and VMWare decide to go ahead with a spinoff, it would occur in September 2021 or later, and Dell would seek to qualify the deal as tax-free for federal tax purposes.
