Dell to get $10bn dividend in VMware spin-off

Shares in Dell Technologies jumped 9 per cent in after-market trading on Wednesday after the US computer maker said it would receive a cash dividend of nearly $10bn in connection with the spin-off of its stake in VMware, easing pressure on its balance sheet.

Dell, which owns 81 per cent of the data centre software company, said VMware would pay out $11.5bn-$12bn in total as a special dividend to all of its shareholders.

The software company had been looking into how best to cut ties with Dell since the middle of last year. VMware said a special committee of its board had approved the dividend, which would be paid immediately prior to the spin-off.

Dell was carrying $34bn in net debt at the end of January, a legacy of its complex $67bn acquisition of storage company EMC in 2016. To retain EMC’s controlling stake in VMware without undermining its own balance sheet, Dell allowed the 19 per cent rump of VMware’s stock to continue trading publicly, while also issuing a second class of so-called tracking stock in VMware.

The complicated structure and large amount of debt amounted to unfinished business that was dragging on the share price, leading Dell first to buy back the tracking stock in 2018 before looking into a full spinout of VMware.

Founder Michael Dell, who has used a series of deals to turn his PC maker into one of the most diversified US enterprise technology companies, argued that the original structure was needed so that the various companies in the group could jointly sell their products and services to their common customers.

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Announcing the plan on Wednesday, the companies said they had instead reached a commercial agreement that “preserves and enhances their strategic partnership”.

Including Wednesdays’ after-market bounce, Dell’s shares have risen 95 per cent since it said it was exploring a spin-off, as investors have looked forward to a simplified ownership structure, less strain on its balance sheet, and a higher valuation thanks to an end to the “conglomerate discount” that previously attached to its shares.

The agreement to set VMware loose for the first time since it was bought by EMC in 2003 comes three months after Pat Gelsinger, its longtime chief executive offer, quit to run Intel.

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