VMware was the crown jewel in the EMC deal

Is anyone really that surprised by Dell Technologies’ plan to spin off VMware? I’m not a world expert in either company, but there never seemed to be a seamless match between the two that suggested they were better together than apart.

Let’s not forget, Dell didn’t acquire VMware directly. The virtualisation pioneer came into the Dell fold by default as part of the $67bn deal to acquire EMC which was completed in 2016.

Even when it was owned by EMC, VMware was run as a separate company and it continued to be run as a standalone entity after the Dell acquisition. So it shouldn’t really be that astounding if Dell has opted to sell the 81% stake it owns in VMware.

At the time of the EMC deal, Michael Dell described VMware as “a crown jewel of the EMC federation”, but it’s hard to see how that stacks up, given the latest announcement. It also doesn’t quite fit with comments by then VMware CEO Pat Gelsinger to analysts that Dell intended to be “a larger, longer-term owner” of the company over time.

Nevertheless, Michael Dell made all the right noises when the company announced the plans. “By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” he said.

He claimed that both companies would “remain important partners, with a differentiated advantage in how we bring solutions to customers”.

VMware CFO and interim CEO Zane Rowe said the spin-off would provide the company with “an enhanced ability to extend our ecosystem across all cloud vendors and on-premises infrastructure vendors and a capital structure that will support growth opportunities”.

In a conference call with analysts, he said VMware was “very pleased” with its relationship with Dell, stressing that the two companies did a significant amount of business together.

The spin-off also presented an opportunity to enhance the partnerships VMware had with hyperscalers. Also, Rowe reiterated the company’s commitment to its subscription and SaaS portfolios.

Under the deal, Dell and VMware have set a five-year timeframe for their existing product and GTM agreements with automatic one-yearly renewals.

What stands out, however, is that possibly the biggest benefit of the deal for Dell is that VMware will pay the company up to $9.7bn to buy its 81% shareholding, a sum that will quite possibly be tax-free. That money will come in handy as Dell deals with the large debt it built up from the EMC purchase.

I’m no financial expert – as my bank account can amply testify – but is there an argument to be made that the main motivation for this deal is to transfer debt from Dell to VMware – and to do so in the most tax-efficient manner?

Whatever the merits of the spin-off, in one respect at least, VMware has lived up to its billing as “the crown jewel” of the EMC deal, although perhaps not in the way originally envisaged.