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6 Reasons Why A Dell-VMware Spin-off Is Likely To Happen

CRN breaks down the six reasons why Dell Technologies could potentially spin off its 81 percent stake in VMware after reviewing recent SEC filings from both companies.

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Would Boost Dell’s Investment Grade Rating

By spinning off its 81 percent stake in VMware, it would provide Dell with new cash to chase its goal of having investment-grade credit. Having a better investment grade rating would provide Dell more financial flexibility, lower debt service costs and likely attract new investors. In an SEC filing, Dell said spinning of VMware shares would boost its credit rating and help it achieve an investment grade rating quickly.

Dell Technologies goal would be to (1) maintain VMware’s credit rating of investment grade and (2) improve Dell Technologies’ credit rating at, or shortly following consummation of, the spin-off,” said Dell in its filing.

The value of Dell’s stake in VMware is worth about $47 billion as of Friday morning, which is larger than Dell’s entire $43 billion market cap.

It is also key to note that before Dell confirmed its potential plan to spin off VMware this, which sent its stock soaring, its market cap was far less. In June, Dell’s total valuation was approximately $33 billion. Having its entire market cap worth less than its stake in VMware means that the market is giving Dell a negative value to its massive portfolio of servers, storage, PCs and other IT assets.

One reason why Dell hasn’t gained the investment grade it wants is due to its heavy debt stemming from its purchase of EMC which makes it less attractive to new investors. For example, Bank of America raised its price target for Dell from $60 per share to $70 per share following the news that Dell was looking at a VMware spin-off.

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