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Dell, VMware Disclose Merger Discussions

Michael Dell keynote

Michael Dell

Dell Technologies and VMware¬†disclosed that they’re exploring potential merger scenarios with each other. The chatter was first reported by¬†Reuters. The report reinforces Dell’s apparent desire to move beyond hardware, and an apparent quest to emerge from private equity ownership.

There’s no guarantee that an actual deal will surface, Dell added.

Rumors about so-called reverse merger discussions have swirled for a week. Under that scenario, the smaller VMware would actually acquire Dell. That scenario raised concerns from VMware shareholders, who apparently don’t want to get bogged down with PC- and server-centric hardware investments. VMware’s shares fell as much as 20 percent¬†earlier this week while the reverse merger rumor swirled.

Among the potential concerns in VMware investor, partner and customer circles: VMware has finally turned the corner, moving beyond traditional server virtualization to pioneer markets line network virtualization (NSX) and storage virtualization (vSAN). With those rapid growth markets in mind, shareholders may not want distractions that involve Dell’s hardware-heavy offerings.

Dell, VMware: Let’s Kick Around Ideas

Still, the VMware investor concern apparently didn’t deter Dell and VMware from at least exploring some deeper joint business options. Also of note: VMware CEO Pat Gelsinger has extensive hardware market experience from his days at Intel.

Pat Gelsinger

According to Reuters:

“Dell plans to announce as early as Friday that it will review a possible reverse merger with VMware, as well as other alternatives, including an initial public offering or asset divestitures, the three sources said.

VMware plans to announce that it will form a special committee of board directors to consider a combination with Dell, according to the sources. VMware is 80 percent-owned by Dell, so the special committee is aimed at making any combination subject to approval by disinterested directors who will safeguard the interests of VMware minority shareholders, the sources added.”

Dell has essentially confirmed the report in an SEC filing, stating that the company may explore a deal with VMware — though there’s no guarantee that a deal will surface. Also, Dell and VMware do not plan to sell their businesses to other parties, the disclosure said.

In terms of potential asset divestitures, Dell could possible sell or spin off RSA (security), Pivotal Software (app development for any cloud) or Virtustream (specialized cloud services), among other business components, analysts have speculated.

Dell Private Equity Owners: Growing Restless?

Dell is backed by Silver Lake, a major private equity firm that has owned about 18 percent of the company since 2013. After going private, Dell in 2015 acquired EMC. That $67 billion deal closed in 2016.

Fast forward to present day, and perhaps Silver Lake’s investors are wondering how they can potentially cash out of a hardware business where traditional servers and storage across Dell and EMC face such intense pressure from public cloud services like Amazon Web Services (AWS) and Microsoft Azure.

Each quarter for the past few years, Dell has typically announced solid channel partner momentum. However, the big picture remains challenging: Dell is under pressure to boost its profitability after the EMC deal failed to deliver the cost savings and performance it projected, while higher component costs and a challenging data storage market have eroded its margins, Reuters reports.

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