Partners: Dell Backing Off Of VMware Merger 'Keeps The Peace' With OEMs

VMware's stock surged more than 6 percent on Monday following a Bloomberg report that said Dell was backing away from a potential merger with the virtualization technology leader.

Round Rock, Tex.-based Dell is "leaning against" the option of pursuing a reverse merger with VMware, according to Bloomberg, citing people familiar with the matter. The report comes months after Dell CEO Michael Dell confirmed that Dell Technologies' board of directors was evaluating a merger with VMware.

VMware stock was up more than 6 percent as of the close of Monday's trading. Dell Technologies stock was up 2 percent at $74.35 per share.

[Related: 10-K Breakdown: 5 Potential Risk Factors Facing Dell Technologies]

Dell channel partners said although a Dell-VMware merger could create tremendous technology synergies, backing off the deal will allow VMware to maintain strong, strategic technology partnerships with the likes of Hewlett Packard Enterprise, Lenovo and many more IT companies.

"Dell has to play both sides of the coin with the big boys. So keeping [VMware] separate as is, keeps the peace," said Michael Goldstein, president and CEO of LAN Infotech, a Fort Lauderdale, Fla.-based solution provider who partners with Dell, Microsoft, Cisco and VMware.

Goldstein said having complete control of both the hardware and software would give Dell "a really big leg up over the other OEM partners," but could make other vendors hesitate about creating technology integrations in the future.

One executive from a solution provider who partners with VMware said the company is still the "golden standard" for on-premise virtualization. "For VMware, and VMware investors, it would be a good thing for Dell and VMware to stay in their own lane for the sake of OEMs and customers who want VMware to remain somewhat independent," said the executive, who did not want to be named.

Dell owns 81 percent of VMware after acquiring EMC in 2016 for $67 billion.

Partners said Dell is searching for ways to combat its more than $52 billion in debt, which mostly stems from the EMC acquisition. The federal Tax Cuts and Jobs Act passed by congress in December lowers the corporate tax from 35 percent to 21 percent, but it also limits the tax deductibility of interest payments to 30 percent of a company's earnings before interest, taxes, depreciation and amortization (EBITDA).

Manak Ahluwalia, CEO and founder of Aqueduct Technologies, a Dell partner named to CRN's 2018 Managed Service Provider 500 list in the Elite 150 category, said the tax law changes the way organizations can write off debt.

"The new tax laws that came out significantly changed the way the organizations could write off some of the interest expenses regarding that debt, which became highly disadvantageous for organizations that had to be debt-laden, that had done mergers like Dell-EMC. Because Dell and EMC still retained majority ownership and control of VMware, I viewed the [potential VMware merger] as one of the best courses of action for them to get out of that debt load and reenter the public market," said Ahluwalia. "So it's the best way to get to profitability and to reduce their debt exposure."

Dell Technologies-backed Pivotal Software recently filed for an initial public offering, hoping to raise up to $592 million with a share price of between $14 and $16. Dell is currently Pivotal's majority stockholder.

According to an S-1 form filed with the U.S. Securities and Exchange Commission last week, Pivotal stated, "Dell Technologies will own, indirectly through its subsidiaries, 175,514,272 shares of our outstanding Class B common stock, which will represent approximately 70.1 (percent) of our total outstanding shares of common stock and approximately 95.9 (percent) of our combined voting power immediately after this offering."

Dell has paid down $10 billion in debt since completing the EMC deal.

In Dell's recent 10-K filing with the SEC, under the 'Risk Factors' section, the company said a "substantial level of indebtedness could have important consequences," such as reducing funding for capital expenditures and acquisitions. Dell said it may be unable to comply with financial and other agreements associated with the debt, which could limit its ability to "incur additional debt, make investments, and sell assets, which could result in an event of default that, if not cured or waived, would have an adverse effect on Dell Technologies' business and prospects and could force it into bankruptcy or liquidation."

Dell is expected to make a decision on potentially merging with VMware sometime this month.