Dell is considering options for its VMware stake, The Wall Street Journal reported Tuesday. A Dell pavilion at an event in 2019.
Photo: Jordi Boixareu/Zuma PressAt 21 years of age, it’s high time that VMware leaves the nest.
Public investors have never known an independent VMware. Founded in 1998, the software maker was snapped up by EMC about five years later. VMware’s initial public offering in 2007 put only a 15% ownership stake on the market. EMC retained the rest, which moved to Dell when those two companies merged in 2016.
As such, VMware has long added a nice bit of software diversity to much larger companies beset by slowing legacy hardware businesses. But that has come at a cost. Since Dell announced plans to buy EMC in late 2015, VMware has averaged a 9% discount to the S&P 500 Software and Services Group, based on forward earnings. It isn’t cost-free for Dell either, which has been trading at what many analysts consider a “conglomerate discount” of around 8 times forward earnings—nearly 60% below the S&P 500’s average.
Hence, the interest in unlocking value. The Wall Street Journal reported late Tuesday that Dell is considering options for its VMware stake, including spinning out part or all of the remaining shares to the public or possibly buying up the listed float. Most analysts consider the former a stronger possibility—especially since the latter would add further to Dell’s already crushing debt load. Dell shares were up 7% Wednesday morning while VMware’s gained nearly 4%.
No deal is assured, and a full spinout can’t take place until September of next year anyway, due to tax rules related to the EMC transaction. But the complicated ownership structure has long acted as a cloud over VMware, which has otherwise adapted and sharpened its performance for a software market now driven by cloud computing. The company also has a strong play in the remote-working trend with its Digital Workspace service, which can be distributed through the major cloud platforms run by Amazon. com, Microsoft and Google.
For VMware holders, this taste of freedom should prove appetizing.
Write to Dan Gallagher at dan.gallagher@wsj.com
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