Dell Votes to Buy Back VMware Tracking Stock and Go Public again

Shareholders in Dell Technologies Inc.’s tracking stock cleared the way for the parent company to go public again this morning as they approved a revised offer that gives them control of Dell’s VMware Inc. subsidiary and pays a rich reward to founder Michael Dell and Silver Lake Partners.

Under the terms of the deal, Dell Technologies is scheduled to return to the public markets on Dec. 28, trading under the stock symbol DELL on the New York Stock Exchange.

The deal caps a tumultuous six-month struggle between Dell, its investment partners and activist investors including Carl Icahn and Elliott Management, who argued that the deal unfairly devalued VMware shares to the benefit of Michael Dell and Silver Lake, which collectively invested $10 billion in Dell when the company went private in 2013. Dell Technologies’ initial offer of $109 per share sparked a clash that forced the company to return to the bargaining table and sweeten the offer.

The deal marks a bit of a concession by Michael Dell, who took the company private complaining that the public markets didn’t permit leadership to plan beyond the next quarter. However, that was before Dell’s blockbuster 2016 acquisition of EMC Corp. for $67 billion. In a prepared comment this morning, the Dell founder signaled a change in tune about the virtues of private ownership, saying the deal “strengthens our strategic position, as we continue to deliver innovation, long-term vision and integrated solutions.”

A more immediate benefit will be increased latitude to pay down its debt load, which still stands at more than $50 billion. Today’s shareholder approval gives Dell 81 percent ownership of VMware common stock, a controlling interest it can use to tap the public markets to pay off the debt more quickly.

“It’s a good deal for investors and likely will not make a difference to customers, and that’s a positive,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “Dell’s leaders have promised to run the company year-to-year, not quarter-to-quarter, which will likely attract longer term investors. It’s a win-win.”

Although Dell has more financial leverage as a public company, its first order of business must still be to pay down its debt, said David Vellante, chief analyst at Wikibon, a blog post of the sister company. “I don’t foresee a major change in Dell’s behavior,” he said. “Rather, I see this as a way to simplify the corporate structure and eliminate the fuzziness of a tracking stock.”

Dell has conducted itself much like a public company even while it was private, according to Vellante. “Dell will be more scrutinized as a public company and it will be harder to write its own narrative, but they’re pretty transparent today in terms of financials,” he said.

The DVMT tracking stock was created in 2016 to help Dell finance the EMC deal. VMware was widely seen as the jewel in the crown of EMC’s collection of acquired companies, and the tracking stock was a way to give EMC shareholders a continued stake in the company.

EMC had bought VMware for $635 million and today the virtual-machine software company has a market capitalization of $67.2 billion, or more than 100 times the price EMC paid. The DVMT tracking stock is up nearly 140 percent since it was created.

Despite that performance, some investors grumbled that the deal didn’t give them enough of a stake in VMware’s success. Investment bankers had originally forecast that DVMT shares would trade at about a 10 percent discount to VMware stock, but the actual discount turned out to be closer to 40 percent, with the difference amounting to a windfall for Michael Dell and Silver Lake. The Financial Times this week estimated that the delta netted Dell and Silver Lake about $11 billion in paper profits.

Going forward, the trick for Dell will be to manage the nearly constant pressure from shareholders to maximize the value of VMware stock, which makes up the majority of Dell Technologies’ overall value, Vellante said. “That’s the dynamic that plagued EMC as a public company,” he said. “Activist investors will jump on any compression of growth and cash flow to press for change.”

However, the analyst sees Dell as a better-run company than EMC, with a larger supply chain and more diversified business. “Dell must focus on execution and continuing to streamline costs,” he said. “It will have to simplify its portfolio and better direct its research and development, which is exactly what [Vice Chairman Of Products And Operations] Jeff Clarke is doing.”

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