Dell/VMware: tycoon says partial farewell to gift that kept on giving

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Sometimes a side hustle works out better than the day job. That applies to VMware. The pioneering virtualisation software business has contributed more to Michael Dell’s multibillion-dollar fortune that his eponymous tech company.

This week, VMware becomes a fully independent, standalone company. Dell Technologies, still best-known for desktop and laptop computers, is spinning off its 81 per cent interest to its shareholders, tycoon included.

VMware has been public since 2007, when it was controlled by parent EMC. That storage titan was acquired by privately held Dell in 2016 for $67bn. VMware was so highly regarded that when Dell itself went public again in late 2018, the implied equity value of the rest of the empire was nil for a while. That anomaly no longer exists: Dell shares have doubled in the last two years.

VMware, as it shakes off the yoke of Dell, is not quite the hi-flyer it once was. Tech hype now favours cloud computing instead. VMware’s enterprise value is still more than $60bn. It is paying an $11bn dividend to its shareholders — primarily to Dell — as a parting gift and reminder of its strength.

Michael Dell took his hardware-heavy business private in 2013 for around $25bn. Today, that figure is more than four times higher. These days, Dell defines itself as a diversified technology vendor specialising in dull but well-entrenched enterprise software.

Dell accordingly trades at a modest 11 times forward earnings, in line with the likes of Hewlett-Packard. Revenue growth is only in the low single digits, but profit margins are healthy and will fund dividends and buybacks. Dell’s core debt has dropped from $40bn three year ago to under $30bn and the company is now rated investment grade.

VMware handed out another $11bn dividend a few years ago to help clinch the Dell listing. After its latest $11bn payout, it will turn the faucet off for good. But the big Dell shareholders — Michael Dell, Silver Lake and Elliott Management will hold the shares instead. They can congratulate themselves on the success of their investment.

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