Last week we discussed the possibility that Dell may consider selling VMware as a means of coping with its heavy indebtedness, a burden that has persisted since its Acquisition of $67 billion of EMC in 2016. VMware was the most valuable asset of the EMC family of companies, and it remains essential to Dell’s hybrid cloud strategy today.
As CNBC pointed out as of last week, VMware is a far more valuable company than Dell itself, with a market capitalization of nearly $62 billion. Dell, on the other hand, has a market capitalization of around $39 billion.
How is Dell, which owns 81% of VMware, worth less than the company it controls? We think it’s tied to that debt, and if we’re right, Dell could unlock a lot of its own value by reducing its debt. With this in mind, the sale, partial or not, of VMware is starting to look like a no-brainer from a financial point of view.
At the end of his last trimester, Dell had $8.4 billion in short-term debt and long-term debt totaling $48.4 billion. That’s a lot, but Dell has the ability to repay a significant portion of it by leveraging the value locked up in its VMware stake.
Yes, but …
Nothing is ever as simple as it seems. As Holger Mueller of Constellation Research pointed out in our article last week, VMware is the only part of the Dell family that really continues to innovate. Meanwhile, Dell and EMC are stuck in hardware hell at a time when businesses are moving to the cloud faster than ever due to the pandemic.
Dell is essentially handicapped by a core business of selling computers, storage and the like to internal data centers. While it also seeks to modernize this approach by trying to be the hybrid nexus between on-premises and the cloud, economics also stands in the way. The pandemic has made the difficult prospect of selling big business even more difficult without major conferences, golf outings and business lunches to grease the skates of commerce.