Michael Dell weighs combining tech businesses into one

Jan. 31, 2018

After years of creative corporate structures and financial maneuvering, Michael Dell is finally ready to bring all the pieces of his technology empire under one, publicly traded roof.

The billionaire’s ultimate goal is to create a structure that would help his two companies, Dell Technologies Inc. and VMware Inc., better manage a massive debt load, according to people familiar with the matter. One favored option, aside from an initial public offering for Dell, is combining the businesses and shifting Dell’s debt onto VMware’s balance sheet, the people said. That would also allow VMware’s free cash flow to be used to pay down some of the debt, they said.

In a combination, VMWare’s management would most likely remain in place, with Dell acting as a parent company, the people said. Much of the transaction would be paid for with VMware stock, over which Dell has about 98% of the voting control, said the people, who asked not to be identified because the details are private. VMware’s stock rose 59% in 2017.

Dell has been considering options to return the company to public markets, including through an initial public offering. Structuring the deal as a combination with VMware would allow Dell to reverse into that company’s listing, without going through a formal IPO.

It would also expand what the combined company can do for its clients. Dell sells server computers and storage devices that help companies run corporate applications and store data. VMware is the leading seller of virtualization software, which is used to help companies cut costs by combining a few of those applications and tasks on a single server device.

Representatives for Dell and VMware declined to comment. The potential reverse merger was first reported by CNBC.

Michael Dell would also use the transaction to get rid of a novel security borne out of Dell’s 2016 acquisition of EMC Corp. and that company’s stake in VMware. The tracking stock, trading as DVMT, is designed to mimic the value of VMware without giving holders any voting rights or ownership of the asset.

Those shares would be subsumed in the newly combined Dell-VMware, said the people. The company hasn’t decided if it would swap them for shares of the new company or acquire them with cash, the people said. DVMT is down about 15% since Jan. 25, when Bloomberg first reported the discussions. It has a market valuation of about $15 billion.

Michael Dell has proved in the past that he can get complicated deals done. He triumphed in a months-long battle against investors, including billionaire financier Carl Icahn, to take his eponymous company private. Later, Dell was able to wrangle financing for the EMC takeover, the biggest-ever tech deal at the time, partly by raising cash through the revival of a dot-com era fad in the tracking stock.

Dell’s 2016 acquisition of EMC nearly tripled the company’s debt load at the time. All told, Dell had around $48.5 billion of bonds and loans as of Nov. 3. Before it went private in 2013, it had less than $7 billion of debt, according to data compiled by Bloomberg.

The Dell board will meet later this month to discuss options, the people said. Round Rock, Texas-based Dell may also decide not to make any such moves at this time, they said.

Private equity firm Silver Lake, which committed more than $2 billion to the combined Dell-EMC, would get a path to monetizing its stake if the company had a public listing. While the firm is in no hurry to exit its stake, a public structure would make it easier for it to do so, the people said.

A representative for Silver Lake declined to comment.

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