Dell considering sale to VMware in reverse-merger and biggest tech deal ever

Dell Technologies Inc is considering a sale to VMware Inc in a reverse-merger, CNBC said, quoting sources. The company may also pursue a traditional initial public offering. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - After years of creative corporate structures and financial maneuvering, Michael Dell is finally ready to bring all the pieces of his technology empire under one, publicly traded roof.

Dell Technologies is considering a sale to VMware in a reverse-merger, CNBC said, quoting sources. The company may also pursue a traditional initial public offering, but a reverse merger would allow Dell to avoid a new public offering, CNBC said.

Dell currently owns 80 per cent of VMware, after it acquired its parent EMC Corp in 2015.

Michael Dell's ultimate goal is to create a structure that would help his two companies, Dell and VMware, better manage a massive debt load, according to people familiar with the matter. One favored option, aside from an IPO for Dell, is combining the businesses and shifting Dell's debt onto VMware's balance sheet, the people said. That would also allow VMware's free cash flow to be used to pay down some of the debt, they said.

In a combination, VMWare's management would most likely remain in place, with Dell acting as a parent company, the people said. Much of the transaction would be paid for with VMware stock, over which Dell has about 98 per cent of the voting control, said the people, who asked not to be identified because the details are private. VMware's stock rose 59 per cent in 2017.

A combined company would expand what it can do for its clients. Dell sells server computers and storage devices that help companies run corporate applications and store data. VMware is the leading seller of virtualisation software, which is used to help companies cut costs by combining a few of those applications and tasks on a single server device.

Representatives for Dell and VMware declined to comment.

Michael Dell would also use the transaction to get rid of a novel security borne out of Dell's acquisition of EMC and that company's stake in VMware. The tracking stock, trading as DVMT, is designed to mimic the value of VMware without giving holders any voting rights or ownership of the asset.

Those shares would be subsumed in the newly combined Dell-VMware, said the people. The company has not decided if it would swap them for shares of the new company or acquire them with cash, the people said. DVMT is down about 15 per cent since Thursday, when Bloomberg first reported the discussions. It has a market valuation of about $15 billion.

Michael Dell has proved in the past that he can get complicated deals done. He triumphed in a months-long battle against investors, including billionaire financier Carl Icahn, to take his eponymous company private. Later, Dell was able to wrangle financing for the EMC takeover, the biggest-ever tech deal at the time, partly by raising cash through the revival of a dot-com era fad in the tracking stock.

Dell's 2016 acquisition of EMC nearly tripled the company's debt load at the time. All told, Dell had around $48.5 billion of bonds and loans as of Nov 3. Before it went private in 2013, it had less than $7 billion of debt, according to data compiled by Bloomberg.

The Dell board will meet later this month to discuss options, the people said. Dell may also decide not to make any such moves at this time, they said.

Private equity firm Silver Lake, which committed more than US$2 billion to the combined Dell-EMC, would get a path to monetising its stake if the company had a public listing. While the firm is in no hurry to exit its stake, a public structure would make it easier for it to do so, the people said.

A representative for Silver Lake declined to comment.

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