VMware on Friday confirmed the rumors that Michael Dell is considering taking his massive new company, Dell Technologies, public. It also said Dell was not considering selling his company to an outside buyer.
VMware mentioned the possibility in a filing with the Securities and Exchange Commission that said Dell was considering a so-called reverse merger with VMware, a public company it mostly owns, as well as an initial public offering — or doing nothing at all.
Dell inherited VMware when it bought VMware’s parent company, EMC. Dell now owns 82% of VMware’s stock, which has been on a roll lately — shares hit an all-time high of about $150 in late January, it’s up more than 40% over the past year.
Investors weren’t thrilled when the rumor surfaced Monday, with the stock dropping 8%. It was down a bit on Friday, too, on the news that it wasn’t just a rumor.
But why would Dell, who fought so hard to go private in 2013 that he burst into tears in front of the whole company when he finally succeeded, want to go public again?
Remember, the go-private scheme involved a yearlong fight with the activist investor Carl Icahn, who was trying to gain control of Dell’s board. Though Icahn didn’t succeed, his fight forced Dell and his financier, Silver Lake, to pay a lot more to Dell’s shareholders.
Dell took on a lot more debt to do that. He again borrowed up to his eyeballs to buy EMC for $67 billion in 2016.
At the end of the last quarter, Dell had $52.5 billion in debt on its balance sheet, including from subsidiaries like VMware. Now, the new tax law severely limits the amount of interest a company can write off.
Christopher Eberle, a Wall Street analyst at Nomura, is one of many who think Dell is eyeing VMware’s healthy cash flow and $11.6 billion cash on hand to help it pay off some of that debt. A reverse merger would allow it to swallow that cash.
This was such a huge concern for VMware’s stockholders when Dell was trying to buy EMC that Michael Dell spent a lot of time promising them that he wouldn’t hurt VMware after he mostly owned it.
Dell also included an internal blog post addressing his company’s debt in the SEC filing:
“We are in excellent financial condition. We have repaid approximately $10B of gross debt since the close of Dell/EMC. We are also excited about the positive impact of tax reform on the US economy and believe any impact for Dell Technologies, based on what we know today, will be more than manageable.”
And he also explained why VMware publicly confirmed the speculation:
“We would normally keep our deliberations confidential until a particular course of action is determined, but because Dell Technologies owns ~82% of VMware, we are required to make a public filing with the US Securities and Exchange Commission.”
Others say all of this is most likely just a trial balloon for Dell to see how VMware’s shareholders would react to the idea of Dell slipping into their holdings.
Here’s what VMware (“the Issuer”) said in that filing:
“Dell Technologies is evaluating potential business opportunities, including a potential public offering of Dell Technologies common stock or a potential business combination between Dell Technologies and the Issuer. Dell Technologies is also considering maintaining the status quo.
“The potential business opportunities currently being evaluated by Dell Technologies do not include the sale to a third party of Dell Technologies or the Issuer.
“The Reporting Persons have not determined which, if any, potential business opportunity to pursue and there can be no assurance that any potential business opportunity will be pursued, the terms thereof, or whether, if pursued, any such business opportunity would be consummated.”