The move follows months of rumors after the two companies in February first confirmed they were mulling a merger.
Dell owns 81 percent of VMware. It issued the tracking stock to fund its EMC acquisition in 2016.
Under the deal announced today, Dell will exchange each share of VMware tracking stock for 1.3665 shares of its Class C common stock, or $109 per share in cash not to exceed an aggregate amount of $9 billion. The cash part will be financed by a one-time $11-billion cash dividend pro rata paid to VMware stockholders. Any remaining cash will be used to fund future share repurchases or pay down debt.
After the deal closes, Dell’s Class C common stock will then be publicly listed on the New York Stock Exchange. This will allow the company to go public without a formal initial public offering (IPO).
VMware stockholders will own between 20.8 percent and 31 percent of Dell, depending on how many choose the cash instead of the all-stock option.
Both companies’ stocks soared toward record highs on Monday morning after the companies announced the agreement.
“After the transaction concludes, I am looking forward to VMware’s continued independent status, strategy, and capital allocation policy for organic investment, M&A, and shareholder returns,” said Michael Dell, the CEO of Dell Technologies and chairman of both the VMware and Dell boards, in a statement.
Michael Dell currently owns 72 percent of Dell Technologies’ common shares. He will continue as chairman and CEO after the deal.
VMware CEO Pat Gelsinger in a statement said his company is “pleased” to offer the one-time dividend to its stockholders. “We remain laser focused on our strategy to deliver innovative software that drives customer success as a strategic and growing independent entity,” he added.
Analyst Says Deal Makes Sense
Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, said the deal makes sense.
“I don’t expect any negative customer impact, as nothing but the financial structure will change,” he wrote in an email. “According to the company, no strategic or management changes will be made as a result, and Michael Dell will still own 47 percent to 54 percent of the company. Dell loses its ability to be as nimble from quarter to quarter, but the reality is that it had to file quarterly reports anyways, given its VMware stake.”
Paying down its debt will be key, but barring a massive industry downturn, that shouldn’t be a problem, Moorhead added.
“The company paid down 25 percent of its $42 billion debt in two years, and cash flow is strong,” he said. “The company’s go-forward opportunities in IoT, the edge, AI, and connectivity are very profitable ones, buttressed especially by software and services from VMware, RSA, Secureworks, and Pivotal. There are still good profit pools in storage, HCI [hyperconverged infrastructure], and networking infrastructure, and going forward, machine learning.”
Just last week, IDC published its latest converged systems revenue numbers that found Dell and VMware — for the second consecutive quarter — are the leading HCI hardware and software vendors, respectively.