Technology

Dell Could Finally Unlock Billions of Value from VMware

If, as the Wall Street Journal reported exclusively on Tuesday, Dell Technologies Inc. (NYSE: DELL) is indeed exploring its options related to its VMware Inc. (NYSE: VMW) segment, a spinoff of Dell’s 81% stake in VMware would have to wait until September of next year. But there are other options.

One, of course, would be to acquire the 19% stake in VMware that Dell does not already own. Another is a sale of all or some of its current stake in VMware’s cloud-computing segment.

At Tuesday’s closing price of $49.01 per share, Dell had a market cap of around $36.3 billion. VMware’s market cap at Tuesday’s close was $62.5 billion. At that price, Dell’s stake in VMware would have been valued at around $50.6 billion.

That’s enough to pay off completely Dell’s $47.7 billion in long-term debt. Money’s cheap these days though, so maybe it makes more sense to hold on to a majority stake in VMware and ride the cloud-computing wave. After all, the PC business is not growing, so an integrated server-storage offering for big data centers is going to drive Dell’s business for the next several years.

While the Wall Street Journal is reporting that the company is figuring out to do with its VMware segment, maybe a better option would be to jettison the PC business. That is if Dell could find a buyer.

Analyst Daniel Ives of Wedbush Securities said Wednesday morning that a tax-free spinoff of Dell’s stake in VMware is “most appetizing to investors.” Dell’s ownership stake in VMware has been an “albatross” for VMware stock, according to Ives, that is costing the stock $15 to $20 a share.

Dell’s problem, then, is how to create value for its own shareholders. Since coming public in a convoluted transaction in December of 2018, Dell stock has gained just $3, or just over 6%, as of Tuesday’s close.

VMware stock had gained more than 13% in the same period, but another $15, based on Ives’s calculation, would have pushed the stock up another 10%. Stifel Financial raised VMware from Hold to Buy and boosted its price target to $196 from $166 as the move would remove the key overhang in VMware as an independent company.

Capturing that value for Dell stockholders is not going to be easy. Maybe that’s why the company is getting an early start on exploring its options.

Dell Technologies stock traded up about 6.8% at $52.37 early Wednesday morning, in a 52-week range of $25.51 to $59.17. The 12-month consensus price target on the stock is $55.18.

Shares of VMware traded up more than 4%, at $155.14 in a 52-week range of $86.00 to $183.50. The price target is $168.01. Shares posted a high of nearly $162.00 (up 8.5%) earlier in the regular trading session.