Dell spins VMware into a separate company, expecting to receive up to $ 9.7 billion.


Dell shares surged 6.7% on Thursday after news of VMware’s spin-off. Dell will receive up to $ 9.7 billion, with shareholders receiving approximately 0.44 VMware shares for each Dell share. This will allow Dell to reduce its debt and improve its credit rating.

Dell Technologies (DELL) shares surged 6.7% on Thursday to a new high after the company announced its spin-off of software company VMware (VMW).

Dell owns 80.6% of VMware, which it acquired in 2015 as part of its largest acquisition of EMC in its history for $ 67 billion in cash and stock. However, with the acquisition of EMC, Dell took on a huge debt burden that was holding back its growth.

Rumors of a spin-off of VMware surfaced back in June 2020.

Dell executives highlighted the investor benefits of the split and said the stock market did not value the combined companies.

At the close of the deal, Dell Technologies shareholders will receive approximately 0.44 VMware shares per Dell share. VMware will pay special cash dividends to shareholders ranging from $ 11.5 billion to $ 12 billion. Dell will receive approximately $ 9.3 billion to $ 9.7 billion.

Dell expects the deal to close in the fourth quarter and the US Internal Revenue Service (IRS) qualifies the deal as a tax-free side offer to Dell Technologies shareholders.

The split deal will benefit both companies

Dell sees an opportunity to partially pay off its huge debt, boost its credit rating, and focus on long-term growth segments in the spin-off of VMware.

Dell ended its fiscal fourth quarter ended January 29, 2021 with $ 48.5 billion in debt, $ 29.2 billion of which was listed as “principal.”

Dell made efforts to improve its balance sheet last year by selling its cybersecurity division RSA for $ 2.08 billion to a private equity firm.

Dell is also considering selling its Boomi cloud business, which could be valued at up to $ 3 billion, according to Bloomberg reports.

Dell shares received a series of price target hikes from Wall Street analysts following news of the VMware spin-off.

Morgan Stanley analyst Katy Huberty said it would provide “significant benefits for Dell shareholders” and the cash payment from VMware should “accelerate Dell’s progress towards investment grade credit ratings.”

Huberty also raised his target price for Dell shares from $ 107 to $ 117 (18.3% upside from Thursday’s closing price).

VMware CFO Zane Rowe says VMware has been somewhat limited in collaboration with other companies due to its high ownership stake in Dell.

Working as an independent company will give VMware “more opportunities to forge partnerships with different companies,” Roe said.

Following the spin-off, the company said Michael Dell will remain chairman and chief executive officer of Dell Technologies and chairman of the board of directors of VMware. Zane Roe will remain interim CEO of VMware and the board of directors of VMware will remain unchanged.

Pat Gelsinger, who led VMware through the Dell acquisition, left VMware in February to lead Intel (INTC), where he previously served as a senior executive.

Collaboration between the companies will continue, Dell has a five-year commercial agreement with VMware.

Ratings agency Moody’s said Thursday it was revising VMware’s ratings for downgrades following the announcement of a special dividend for Dell shareholders. At the same time, credit ratings of Dell, on the contrary, will be considered by Moody’s for an increase.

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