(Bloomberg Opinion) -- Dell Technologies Inc.’s magical merry-go-round of financial engineering is spinning once again.
The corporate computing giant is examining options for its majority stake in software-company VMware Inc. that include a spinoff of the holdings, the Wall Street Journal reported late Tuesday. VMware shares soared roughly 10% on the news in after-market trading, valuing Dell’s 81% stake at around $55 billion. To understand why Dell would contemplate a transaction like this, you only have to look at Dell’s own market value, which despite a rise of its own on the news of the possible spinoff amounted to only about $40 billion. Put another way, Dell isn’t getting full value for either its ownership of VMware or its own computing and data-storage business that took in around $80 billion of revenue in the most recent fiscal year. And it wants to remedy that.
But for all of shareholders’ early enthusiasm, a spinoff of the VMware stake would appear to be just a superficial fix for the complexity that’s long weighed on the value of Dell’s various businesses. Dell acquired its stake in VMware through the $67 billion buyout of EMC Corp. in 2016. As part of that transaction, the company created a tracking stock that was meant to mirror the value of VMware, which remained independent and publicly traded. It didn’t work very well. The tracking stock lagged substantially behind the price of VMware shares. Meanwhile, Dell’s massive debt load and complicated capital structure made a traditional IPO process difficult when founder Michael Dell and private-equity firm Silver Lake wanted to try to reintroduce the company to the public markets following a 2013 buyout. So in 2018, Dell decided to simplify things by buying out the tracking stock. A protracted battle ensued with shareholders of the tracking stock — including P. Schoenfeld Asset Management and Carl Icahn — who felt they were being low-balled, but eventually a deal got done. In hindsight, owners of the tracking stock were right to push for more cash and a complicated equity-collar mechanism, seeing as the Class C stock that made up the remainder of the takeover bid hasn’t fared as well on the public market as Dell might have hoped. Which brings us back to the present.
If you kept up through that long, winding tale of financial engineering, you might be wondering why Dell went through the process of unraveling the VMware tracking stock if it was just going to recreate the general idea several years later, as this latest spinoff plan would seem to suggest. The exact structure of a spinoff of the VMware stake is unclear and the Journal reports that talks are at a very early stage and may not go anywhere. Potentially, a spinoff would confer more direct ownership of the VMware business to shareholders than the tracking stock previously did, helping to simplify the valuation process. But it’s hard not to shake the feeling that we’ve been here before.
An alternative option that Dell is considering is a buyout of the VMware shares it doesn’t already own, the Journal reported. But that would add to its still mammoth debt load and doesn’t really do much on its own to address the fact that Dell shareholders aren’t inclined to give the company credit for the VMware stake it already holds. Ultimately, a buyout of the rest of VMware, followed by a spinoff of the whole thing, makes the most sense but would take a long time and is easier said than done. Recall that Dell initially tried to bring VMware further into the fold as part of the negotiations that ultimately led to the tracking stock deal, but both management and shareholders of the target company balked.
Is this latest finessing going to make Dell a better-run company? Doubtful. Is it going to boost the company’s stock price over the long run? Maybe. But if after years and years of financial engineering, you’re still not seeing the kind of equity valuation you want, perhaps its the financial engineering that’s the problem.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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