Advanced Computing in the Age of AI | Wednesday, June 16, 2021

As Dell Spins Off VMware, Could Intel Be Lurking as a VMware Buyer? 

Now that Dell Technologies announced its plans to spin off its VMware unit as a move to reduce Dell’s heavy debt load by almost $10 billion, a seemingly unrelated recent move by Intel is now making the spinoff potentially even more interesting.

Back in January, Pat Gelsinger, the CEO of VMware at the time, announced he was leaving the company after 11 years to become the next CEO at Intel. Gelsinger had previously worked at Intel for 30 years before joining VMware as its CEO in 2009. His departure from Intel came after he was reportedly denied a path to the Intel CEO’s job after 30 years with the company.

So how could the VMware spinoff and Gelsinger’s return to Intel be related in the future?

It’s in the nuances of the news, said IT analyst Rob Enderle, the principal of Enderle Group.

Rob Enderle, analyst

“I do wonder if the end game here won’t be Intel buying VMware given Pat Gelsinger, VMware’s ex-CEO, now runs Intel and VMware would be a vast strategic acquisition for Intel,” said Enderle. “The [VMware] technology could advance Nvidia’s recent attack on the datacenter which, through [such an] acquisition, Intel could mitigate.”

For VMware, “it would make more sense for it to be part of Intel, given that the dynamic that created the hypervisor was Intel’s near-constant iteration of chipsets, requiring significant software changes that the hypervisor mitigated,” said Enderle.

Yet even though it may make sense from a practical standpoint, such a move could ultimately be doomed due to regulatory antitrust risks that would perhaps kill such an effort, said Enderle.

But it is still an interesting scenario to consider.

Spinoff Details

The VMware spinoff was unveiled late in the day on April 14 (Wednesday) when Dell announced that the move would result in a special cash dividend of $9.3 million to $9.7 million for Dell Technologies, which would then be used to pay down its debt, according to the company.

Dell acquired EMC in 2015 for $67 billion in 2015, in what remains the largest deal in tech industry history. Dell still has about $50 billion in debt in connection with that acquisition. Dell has an 81 percent equity ownership stake in VMware at present.

By paying down its debt with the money it would receive through the spinoff, Dell said it will position itself for improved investment grade ratings and leave Dell and VMware as stand-alone public companies.

Enderle said he is surprised that the spinoff took so long to finally happen.

“To be successful, VMware has to be hardware-independent,” he said. “Suppose any of the other hardware players become concerned that VMware is overly favoring Dell. In that case, they are likely to pull support from VMware and give it to Microsoft or some other server hardware independent vendor.”

Since the acquisition in 2016, there has been no advantage – and an increasing disadvantage – for VMware to be part of Dell, said Enderle. “With EMC, VMware was both more clearly at arm’s length, and EMC was seen as storage rather than a server vendor, so there was little or no concern. But Dell is a power in the server space, creating a potentially very damaging situation for VMware.”

This was all worsened when Dell used VMware as a vehicle to go public again and created the impression that the two entities had effectively merged, said Enderle.

A Reasonable Strategy: Analysts

Two other analysts said they see the spinoff as sensible for both companies.

Dan Olds, analyst

“Dell took on an enormous amount of debt to purchase EMC and VMware,” Dan Olds, the chief research officer of Intersect360 Research, told EnterpriseAI. “Getting the $10 billion dividend from spinning off VMware will certainly help them pare down their debt and make it easier to grow.”

Ultimately, the move would give Dell a better balance sheet while still preserving the company’s special relationship with VMware, said Olds. “For VMware, it means that they are probably a bit more competitive because they aren’t formally tied to a system vendor and can now be server agnostic as they were when they were a standalone company. I think it will be business as usual for VMware customers and partners, not much will change, although we might see VMware become a bit more aggressive with product expansion since they won’t have to be paying part of Dell’s overhead anymore.”

For some time, Dell has been open about its intentions to shake things up and the spinoff is certainly doing that, said Olds. “All in all, I think it’s a good move for all concerned.”

Charles King, principal analyst for Pund-IT, said that by further paying down its debt using the money from the spinoff, Dell will see ratings agencies like Fitch's and Moody's increase the company’s credit rating, which will reduce costs related to future borrowing for strategic initiatives. “Overall, the VMware spinoff offers Dell significant financial benefits,” said King.

Charles King, analyst

For VMware, which has achieved notable growth and success under former CEO Gelsinger, the move “puts VMware into an ideal position to make the most of the planned spinoff,” added King. “Before EMC was acquired, VMware was considered one of that company's crown jewels and was a key asset driving Dell's interest. While the Covid-19 pandemic has caused economic turbulence worldwide over the past year, recent events suggest that markets and businesses are stabilizing. That makes it a great time for Dell and VMware to plan and execute this spinoff.”

The Dell and VMware Partnership Will Live On

Even after splitting from each other, both Dell and VMware will continue to have a close partnership, according to Dell.

“With an even stronger capital structure, Dell Technologies is poised to further capitalize on the rebound in infrastructure and PC spend, new cloud operating models driving as-a-Service growth, compute moving to the edge, and customers' longer-term digital transformation initiatives,” the company said in a statement following the announcement. “With a strong commercial agreement in place, Dell Technologies will have the ability to continue to work closely with VMware to drive innovation and preserve go-to-market synergies while generating new growth opportunities through an open ecosystem.”

The transaction is expected to close during the fourth quarter of calendar year 2021. At the closing, Dell Technologies shareholders would receive approximately 0.44 shares of VMware for each share of Dell Technologies that they hold, based on shares outstanding today, according to the company.

Dell responded to an email inquiry from EnterpriseAI today by saying it had no further comment on the news.

In an open letter to Dell customers and partners on April 14, Dell CEO Michael Dell called the move “a significant moment and tremendous opportunity for both companies and our customers.”

“As part of this transaction, Dell Technologies and VMware will retain a strong commercial agreement that is unique and differentiated, preserving our relationship while allowing strategic flexibility for both companies,” he wrote. “For you, our customers and partners, the way you engage with Dell Technologies and VMware doesn’t change. Our joint momentum in road maps and innovation and in sales and support all move forward full steam ahead.”

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