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Dell officially spins off 81% equity ownership of VMware

The spinoff agreement provides VMware with increased strategic and financial flexibility to grow its cloud and infrastructure software business.

This story was updated on April 15, 2021:

VMware is officially an independent company once again.

Dell and the VMware Special Committee of independent directors have agreed to terms that include significant simplification to the corporate ownership structure, plus an $11.5 billion to $12 billion special cash dividend immediately prior to the spinoff, subject to closing conditions.

Dell stockholders will receive a proportional distribution of VMware shares held by Dell Technologies, and CEO Michael Dell and Silver Lake Partners will own direct interests in VMware. The two companies have also finalized a commercial agreement.

Dell gained ownership of VMware through its acquisition of EMC in 2015.

News of VMware spinoff plans first came to light in July 2020. In October, Dell said his company intended to keep control of VMware even if it spun off some of its stock, and added that selling shares would not affect products or technologies. At that time, leaders from both companies said they would continue co-development and maintain ties, which appears to be the case.

In February, VMware CEO Pat Gelsinger stepped down after eight years in the role to take over as CEO of Intel. Zane Rowe, executive vice president and chief financial officer of VMware, is serving as Interim CEO.

What's next for VMware?

VMware plans to move ahead in the software and SaaS market, across clouds and hardware infrastructure. Independence from Dell will allow VMware to make strategic moves to achieve this goal, according to Rowe.

In an investor call on Wednesday, Rowe said VMware will continue to work with Dell but being independent provides more flexibility and "more openness for partnerships." He declined to provide specifics on opportunities outside of Dell, which remains a significant shareholder.

Some analysts don't see many repercussions for either company moving forward, as both can continue to work together on the same core products they have prior to the split.

Potentially the good thing about spinning [VMware] off is it at least gives the perception to Dell's other partners that they are now on an equal footing with VMware.
Gary ChenResearch director, IDC

"While it was convenient from a sales point of view to get things bundled together with a product like VxRail, that is something that could have been done with other partners," said Gary Chen, research director of IDC's software defined compute practice. "Potentially the good thing about spinning [VMware] off is it at least gives the perception to Dell's other partners that they are now on an equal footing with VMware. VMware's competitors will be less hesitant about working with Dell."

The move isn't expected to dampen either company's fortunes going forward. But one unknown element is Gelsinger's departure, and whether his successor can keep the company on a roll.

"The market value of VMware is at a peak right now, but whether it stays there depends on how sound the leadership will be coming in after Pat [Gelsinger]," said Geoff Woollacott, senior strategy consultant and principal analyst at Technology Business Research.

Given the growing acceptance of open source across the tech industry, Dell might find it easy to form relationships with VMware competitors that have been more aggressive in embracing open source, Woollacott said.

"VMware's got legacy subscription software that has always competed against open source alternatives," Woollacott said. "But open source, mainly in the form of Kubernetes, is becoming the great equalizer and the markets are moving more and more in that direction."

VMware has made some investments in open source in the recent past, similar to other software companies that have portfolios full of proprietary offerings.

"VMware has a lot of closed software, and most of its money is made off that software," Chen said. "Microsoft was the same way, but look at how they have pivoted to Linux and open source. For [both Microsoft and VMware], it will be a matter of balancing where proprietary software works best and where and how open source software works best."

Through its commercial agreement, VMware and Dell will continue to co-engineer products that provide strategic value, with Dell Technologies providing go-to-market support for VMware's products.

The estimated value of the $11.5 billion to $12 billion special cash dividend that VMware will provide to all stockholders ranges from $27.43 per share to $28.62 per share, based on outstanding shares as of March 16.

The VMware spinoff is expected to close in the fourth quarter of 2021, subject to conditions.

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