Report: VMware Might Buy Dell In Reverse Merger


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Dell Technologies could solve its tax debt problem through a reverse merger with virtualization leader VMware, according to a report by CNBC.

Citing sources familiar with the matter, CNBC Monday said Dell Technologies could emerge as a public company through a reverse merger with VMware, which has a market cap of $56 billion.

The reverse merger would enable Dell to become a public company without needing to file an IPO. Last week, it was reported that Round Rock, Texas-based Dell was considering filing for an IPO or buying the rest of VMware. Dell's board of directors is scheduled to meet later this month to discuss the options.

[Related: Partners: Dell Buyout Of VMware Could Lead To 'Bigger Innovations' Across Dell EMC Portfolio]

The federal Tax Cuts and Jobs Act bill passed by Congress last month cuts the corporate tax rate to 21 percent from 35 percent. However, the bill limits the tax deductibility of interest payments to 30 percent of a company's earnings before interest, taxes, depreciation and amortization (EBITDA).

Dell currently has around $50 billion in debt after buying EMC for $67 billion in 2016.

Jeff Matthews, a former hedge fund manager who still follows the tech industry, said the tax law changes make it "inevitable" that Dell will be forced to change its debt load and capital structure.

"The world around them changed overnight when that tax bill passed," said Matthews. "All of a sudden the amount of interest you can deduct against your taxes is cut dramatically. It squeezes them even more over time. In my view, it is no surprise they want to do something to get out from under all this debt."

No matter what move Dell makes to reduce its debt load it is likely to be a complicated issue, said Matthews. "The Dell EMC deal structure was very complex," he said. "The thing I learned 30 years ago doing M&A inside a company is tax policy drives everything. You don’t really see it in on the outside, but the way deals get structured is to minimize taxes. When this tax law changed, the whole reason for Dell's capital structure changed."

In the past 12 months, Dell has paid total interest of $2.54 billion, a weighted average interest rate of about 4.9 percent, based on its current debt principal, according to Seeking Alpha. In the same period, Dell captured $3.85 billion of EBITDA. The new tax plan will limit Dell's interest deductibility to approximately $1.15 billion in annual interest, or 30 percent of its trailing EBITDA, according to Seeking Alpha.

"If they're making changes to their plans and looking to go public, it has something to do with the tax law changing their total money situation," said Michael Tanenhaus, CEO of Mavenspire, an Annapolis, Md.-based solution provider and Dell EMC channel partner. "There has to be a financial reason to want to make a change. The tax law consequences could be big money."

Tanenhaus said whether Dell becomes public through an IPO or a merger with VMware, the company's strategy is not fundamentally shifting. "I can't imagine that they will fundamentally change their core strategy at this point. This is mostly a structural thing to deal with debt," he said.

Dell owns a majority stake in VMware through the EMC acquisition.

Dell is also considering a public share sale for its Pivotal Software cloud computing venture, according to Bloomberg. Dell met with bankers last year to discuss a potential Pivotal IPO and was told the company was valued at $5 billion to $7 billion, according to Bloomberg.

The move to consider strategic alternatives like an IPO comes five years after Michael Dell completed the largest private equity buyout in history, taking Dell private in a $25 billion deal.

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