VMware Shareholders Don’t Want to Buy, Own Dell Technologies

Michael Dell

Pat Gelsinger

It’s called a test balloon. And it goes something like this: When you want to test an idea or concept in the market, you share it anonymously with the media. Then, you see whether the test balloon flies or pops amid public scrutiny.

Related Update, February 2, 2018, 8:05 a.m. ET: Dell, VMware apparently set to disclose merger discussions.

That’s apparently what’s going on right now at Dell Technologies, where boardroom chatter suggests the company is considering a reverse merger with VMware. Privately held Dell already owns an 80 percent stake in the virtualization company. But according to a test balloon that surfaced on CNBC:

“Dell Technologies could emerge as a public company through a reverse-merger with VMware, the $60 billion cloud computing company it already controls, according to people familiar with the matter.

The reverse merger, whereby VMware would actually buy the larger Dell, would then allow Dell to be traded publicly without going through a formal listing. It would also likely be the biggest deal in tech industry history, giving investors who backed Dell’s move to go private in 2013 a way to monetize their deal, while helping Dell pay down some of its approximately $50 billion debt.”

Sounds intriguing. Until you look at VMware shareholder reaction today on Wall Street.

VMware Shares Drop on Dell Technologies Acquisition Rumors

Indeed, the virtualization company’s stock fell roughly 13 percent by mid-day and more than 16 percent by the time the market closed on Monday.  The steep decline — essentially, the test balloon went pop — clearly  indicates that VMware shareholders don’t necessarily want to get bogged down with Dell’s hardware business.

Indeed, VMware CEO Pat Gelsinger has spent the past three to five years repositioning the company. The results are very promising. VMware has successfully pushed beyond legacy server virtualization to offer network and storage virtualization (NSX and vSAN, respectively). Both lines of business are growing very rapidly. Plus, a relationship with Amazon — aptly dubbed VMware Cloud on AWS — has drawn interest from big-name partners like Presidio.

In my mind, VMware should double down on those fast growth markets — rather than dancing with Dell in a challenging acquisition that involves considerable hardware. Yes, Dell has managed its data center and PC businesses extremely well under private equity ownership. But competing as a publicly held company with lots of hardware is a completely different ballgame. And so far, VMware shareholders don’t want a ticket to that attraction.

Michael Dell Knows Market Navigation

Still, don’t underestimate Michael Dell. He’s faced plenty of shareholder pushback before. After a lengthy battle with key shareholders, Dell’s CEO successfully took his company private with private equity backing in 2013. Will he return to public markets — using VMware as the springboard to do so? Hmmm…

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    One of the most salient points here is around ‘market navigation.’ As you describe, Dell is one of the best at this, and he shouldn’t be underestimated. What also strikes me is that the teams from EMC and VMware who have joined the ranks at Dell have had significant experience marshaling their resources (and partners’ too) in creative ways over the years to invent new opportunities like VCE and others while navigating markets. Innovating with technology AND business models can be massively transformative — and these teams have what it takes to drive innovation in this way, even if the pathway to success is not always clear. As Caesar said, “It’s only hubris if I fail.”

      Joe Panettieri:

      Thanks for weighing in, and for the great closing line. We’ll be sure to track how Dell navigates this one…

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