Michael Dell: Dell Technologies Board 'Considering' IPO, VMware Reverse Merger


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Dell Technologies CEO Michael Dell confirmed Friday that the $80 billion industry behemoth is currently evaluating an initial public offering or a "business combination" with VMware.

"As part of our ongoing multi-year strategic planning, Dell Technologies is evaluating a number of potential business opportunities. As you can see from our results, we do this from a position of strength, with a desire to grow Dell Technologies and its businesses even faster and thrive in the very dynamic IT marketplace," said Dell in an 8-K filing with the Securities and Exchange Commission Friday.

Dell submitted a 13D filing with the SEC that showed its board of directors is evaluating three scenarios: a business combination with its VMware subsidiary; an IPO of Dell Technologies common stock; or continuing with business as usual.

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

Michael Dell, who is chairman of the VMware board, said the company would "normally keep" deliberation confidential until a decision is made, but since Dell owns roughly 82 percent of VMware, it is required to make a public filing with the SEC.

"Nothing has been decided and alternatives are just being considered at this stage. While this process continues, it is business as usual for team members, customers and partners with no changes to current structures, practices and processes," said Michael Dell. "For my part, I remain completely committed to our mission and extremely excited about the opportunities ahead."

VMware CEO Pat Gelsinger, meanwhile on Friday said the virtualization market leader is looking forward to "Dell's continued support as we work to execute our growth plans in the years ahead."

"We are not in a position to speculate on the outcome of Dell's evaluation of potential business opportunities,Dell has been a tremendous partner since it became our majority owner and as we've accelerated our growth," said Gelsinger. "The VMware management team remains laser-focused on serving our customers and partners."

Michael Tanenhaus, CEO of Mavenspire, an Annapolis, Md.-based solution provider and Dell EMC channel partner, said a Dell Technologies/VMware reverse merger would create the "ultimate managed services" partner for the channel.

"VMware is the poster child for software-defined. You're talking about a whole set of software intellectual property around software that when you put on hardware, it can do amazing things," said Tenenhaus. "In the Dell Technologies universe, you have a combination of software and hardware knowledge of how to platform, of how to push more in terms of speed and agility. So ultimately if you put them together, you would have this entity with the ability to deliver – regardless of cloud or on-premise – the ultimate manage service play."

Tanenhaus acknowledged that a reverse merger would  "change the appearance of VMware" to customers and vendors. "Software-defined companies like VMware sometimes struggle with trying to keep hardware neutrality," he said. "They need to be working with more than one OEM. That's why there was so much effort to keep VMware separate despite Dell's ownership  It doesn't de-value VMware, but it could make things interesting."

The potential IPO and reverse merger scenarios were triggered by the passage of the federal Tax Cuts and Jobs Act bill which was passed by Congress in December. 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 approximately $50 billion in debt stemming from its $67 billion acquisition of storage market leader EMC in 2016. 

James Angelini, associate professor of tax accounting and director of the Masters of Science in Taxation program at Suffolk University, told CRNtv the VMware reverse merger would help considerably in reducing the company's tax burden.  "It helps with the tax law and it helps with costs," he said.

The law will put even more pressure on Dell beginning in 2022 when the tax law moves to 30 percent of earnings before interest and taxes rather than 30 percent of EBITDA, said Angelini. "In 2022, it's going to be even worse," he said.

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