Dell Shares Pop on Report that Company is Considering Upping Stake in VMware

Shares of both Dell and VMware were climbing higher on a report that the former is considering options for its $50 billion stake in the latter. Dell owns about 81% of VMware.

The computer maker rose as much as 21% in extended trading on Tuesday after a report from the Wall Street Journal, citing anonymous sources, had said Dell is considering buying out the minority stake of VMware that it doesn’t already own or selling its share of VMware.

Shares of VMware were up over 11% on the WSJ report.

Dell controlled about 81% of VMware’s outstanding common stock and about 97% of the combined voting power of VMware’s outstanding common stock as of May 1, according to VMware’s most recent earnings report.

It was in 2018 that Dell returned to trade publicly after it went private in 2013. It was in 2016 that Dell picked up the shares of VMware through its $67 billion acquisition of EMC, a storage hardware maker.
EMC closed the VMware acquisition in 2004, and in 2007 VMware went public.

“Dell is extraordinarily supportive of an independent VMware,” VMware CEO Pat Gelsinger said to CNBC in 2019.

On Wednesday, Dell shares surged as much as 12% while VMware shares were up almost 9%. It was also on Wednesday that Stifel analyst Brad Reback upgraded VMware to a buy from a hold and increased his price target on the stock to $196 from $166.

“We have long believed Dell would ultimately buy-in the ~19% (~$12.5B) of VMware that it does not own in order to gain full control over VMware’s substantial [free cash flow] of about $4B annually and still expect this to be the ultimate outcome,” Reback stated.

Wedbush analyst Daniel Ives, who has an outperform rating on VMware and a $175 price target, said the talks could be “another head fake for investors” in the “Dell/VMware soap opera.

He added, “The likely path in our opinion, and the one most appetizing to investors, would be a tax-free spinoff for this stake which is worth roughly $50 billion,” Ives said. “The Dell ownership structure has been an albatross around the VMware story and ultimately causes the stock to trade at a discount, a dynamic that would be removed if Dell (and its board) ultimately decided to head down this path.”